Following the sharp and distressing fall on the JSE in the first quarter of 2020, investors were asking themselves whether they should sell their investments and go to cash or other safe-haven assets.
The risk at this point is making a financial decision based on our cognitive biases.
“In a highly uncertain world, we crave certainty. We have a natural tendency to avoid situations that threaten our wellbeing, and we prefer choices that allow us to avoid pain. When a risk seems benign, we may overlook or underestimate it, but when a risk becomes front and centre, we will often prioritise minimising that risk at the expense of all other action – more so if the risk is vivid and visceral.”– Rory Kutisker-Jacobson, Allan Gray Portfolio Manage
The chart below shows the performance of the FTSE/JSE All Share Index year to date.
We assume that an investor receives their quarterly statement 10 days after the end of the quarter. Shocked at the fall in their investment they instruct their advisor to sell either all of their investments or a portion of their investments and move it into cash so that they “don’t lose any more money”. We assume a further five days for the investment to be switched from its underlying holdings into a money market fund.
The red dot represents April 15, the day that we assume an investor would have sold their growth asset exposure in favour of cash. We believe that this is a realistic scenario which illustrates selling into a falling market.
Chart: FTSE/JSE All Share Index year to date performance ending July 14 2020
The market could have conceivably continued to fall in value. However, the decision to make extreme financial decisions when on the back foot, coupled with our fear of a global pandemic and possible global recession, can lead to poor investment decisions. This highlights the repetitive narrative of looking beyond the current context and rather taking a long-term view.
“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Jason Zweig
The quote below reiterates that financial advisors much like the average investor may be tempted to change course during times of extreme volatility and uncertainty. We, however, remain committed to following a disciplined approach in helping our clients protect and grow their wealth over the long-term based on sound financial planning principles. Much like a fund manager who must adhere to their processes in order to achieve desired investment outcomes.
“The key for us, as well as financial advisors and their clients, is to stay disciplined and follow our processes.” – Allan Gray: Discipline is key at times of distress