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Is it reasonable to expect what you want from your investments?

We all want a low-risk portfolio that gives us great returns, but we cannot expect that.

Rather than going into the details of the various investment options available and which ones we think will work (or not), we want to take a step back in an attempt to see the forest for the trees. The current situation in the property sector is just one example that can help us do that.

Very few readers will be surprised when we tell them that SA property had a tough time for several years before 2020. Not only did investors in SA listed property go sideways between 2015 and 2018, but 2019 brought such a dramatic drop in the index that the clock was turned back to 2012 for longer-term investors.

However, many will be quite surprised to hear that the last 12 months have been nothing short of record-breaking for the asset class. This feels completely wrong. How is it possible with business closing down, people losing their jobs and “everyone” working from home lately? Well, the markets (all markets, not only property markets) generally have a very different idea of what is logical than what we may assume when we are caught up in the thick of things.

There is always more to it than meets the eye.

How often has an advisor heard the words: “Why didn’t you get me out of x or y investment before it all went wrong?”, or “How come you didn’t have this or that in my portfolio?” Well, because there is always more to it than meets the eye.

In the property example, the low-interest-rate environment is only one of the tailwinds for the asset class at the moment. There is significant rotational activity in the sector. Some property owners (be it commercial or residential) may be in trouble financially and need to downsize, while some speculative investors are using the opportunity presented by the low interest rates to invest. For every seller, there is a buyer and this creates growth.

Investing is often most successful when you are able to embrace the counterintuitive. Warren Buffet’s investment tip to “be fearful when others are greedy, and greedy when others are fearful” has become a cliché for the same reason that any saying is a cliché – because it is true. If you had the stomach to add to your investment towards the end of March 2020, your existing funds would not only have recovered the losses suffered, but your overall investment would have had the best year in the last several years for SA investors. Instead, we saw massive redemptions from “risky” assets (i.e. equity funds) in favour of reinvestment into “safe” investments like cash. Not only did investors deny themselves the ability to recover and grow (substantially) over the next year, but they also invested in cash during a time when SA interest rates dropped to historical lows.

Many South African financial advisors spent the last three mornings this week attending an online Investment Forum. Speakers from across the globe presented us on almost everything relevant to our industry, from the global economy to investment themes, to fund specific updates. The speakers represented a wide variety of investment philosophies and approaches, but I was interested to pick up on a recurring thread that seemed to come up in several of the presentations; why must we debate whether active or passive management is the best when we have access to both, and they play different roles in an investment portfolio. We don’t need to figure out whether value investing has already passed its moment in the sun, or whether the cycle is only in its early stages because we can combine various different styles in a portfolio.

You may be wondering whether I’ve lost my mind. Surely, I should have known this for years – diversification is after all lesson #1 in every financial planning textbook. No, this was not news to me, but the recurring subtle message did make me step back again to see the forest for the trees.

It made me remember that the best thing that investors can do for themselves is not to pick the single best performing fund or save 2% in tax with an excellent (often very complex) investment structure. While picking the right funds and managing your tax effectively is important, getting too caught up in the detail will likely lead to severe anxiety levels. Anxiety is guaranteed to lead to rash decisions at the worst possible times.

Instead, the best thing that investors can do for themselves is to be invested. Simple as that. If you forget about the illusion that you can be invested in “the best” fund and stop worrying about being invested in “the worst” fund (because last year’s best performer is next year’s worst more often than you may imagine), you can settle on a “good” portfolio and stay invested in it…for as long as possible.

Stop obsessing about the small percentage that the other fund beat your investment by last month and ask yourself whether your investment is doing what you expect of it. If you have a lot of equity in your portfolio, you cannot be too anxious when it falls in line with general markets. If you didn’t expect that to happen, you are not invested in the right portfolio.

Be careful not to confuse what you want from your portfolio with what you expect from it. We all want a low-risk portfolio that gives us great returns, but we cannot expect that. More often than not, you can expect short term volatility from a portfolio that will give you what you want over the long term.  In order to stay invested, you need to make peace with this fact and find that balance between the two.

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Michael Haldane

Global & Local The Investment Experts


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