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Trust in your investment strategy

The most natural instinct for investors is to react to a market crisis by moving to cash or to other asset classes that performed well in the past.

Investing can be highly emotional, even for seasoned investors. We work hard to save for a specific goal or retirement, and we have a high degree of loss aversion. Emotions can, however, detract from returns. Willem Basson from Efficient Wealth discusses the importance of sticking to your investment strategy with Diaan Janse van Rensburg, Managing Director from Naviga Solutions.

What should investors do during a market crisis?

The most natural instinct for investors is to react to a market crisis by moving to cash or to other asset classes that performed well in the past. In most cases, however, investors are better off not reacting to a market crash. The chart for 2020 below affirms this. Investors who switched to cash during the end of February or March materially underperformed cash and equities for the full year.

The chart above shows the return on R100 invested from January 1 2020 to December 31 2020.

Investors who withdrew their investments during the decline have caused significant losses to their investments, which will most likely never be recovered. Those who stayed the course even outperformed those investors that moved to cash before the decline in the equity market. Remember: it is time IN the market, not TIMING the market that rewards investors over the long-term.

Fact: there is no easy way to earn a return. Those investment opportunities that seem to generate good returns without any risk will inevitably disappoint investors. The media frequently reports on schemes that “guarantee” high returns, but inevitably loses the investors’ capital.

What are the risks you should be aware of when devising your investment strategy?

There are mainly three risks that investors should consider:

  1. Inflation risk

    A portfolio should invest in growth assets to protect against inflation.

  2. Investment risk

    You need to ensure that you have a diversified portfolio to reduce this risk.

  3. Institutional risk

    Ensure that the investment company has a long track record, an experienced team and sufficient compliance procedures in place to safeguard against a permanent loss in capital.

What are some of your predictions for the year ahead?

The year 2020 was a testing year for investment professionals around the world, including our clients. Those investors who remained invested benefited from a market recovery during the latter part of 2020, as well as the first quarter of 2021. The continued economic support from governments across the world should support markets. However, the success of the Covid vaccines and geopolitical risk will have an impact on investments in 2021. It is critical that you contact specialists to ensure your investments are optimally structured.

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Willem Basson

Efficient Wealth

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