Two years ago many of us were highly critical of the South African rugby team and its administration, bemoaning that we would never win another test. But last Saturday was a wonderful time to celebrate being a South African supporter.
Investment markets are a little like the Springbok story. A lot of money was put on the All Blacks six weeks ago. Because money always flow into the best performing fund, right?
This week we received an email printed in a widely read publication, which urged individuals to invest everything they have apart from their pension funds and their home into a global equity portfolio. This does reflect the view held by many individuals in the country, despite the famous victory on Saturday. Yes, we woke up to Moody’s putting us on final watch before an expected downgrade, while debt to GDP has moved from 38% to 70% with many challenges remaining.
Yet an interesting fact is that a diversified global investment with approximate 65% in growth assets has returned 373.53%, compared to 351% from a diversified local investment with the same exposure to growth assets. Both these returns are in South African rand and measured over a 14-year time period. This is probably not what most readers would have thought. We do have a home country bias, as well as an anchoring bias when we review portfolios over a shorter period. Many decisions are made based on these biases – such as three years ago when former president Jacob Zuma fired the finance minister of the day. At the time, similar articles were written, and billions of rand left the country at R15 to the dollar. The current rate is close to R14.75 to the dollar.
It is difficult to predict what is going to happen in the future. This makes the journey exciting, if not sometimes hard to travel. Time horizon is critically important and changing a strategy will always result in an unplanned outcome. It makes sense to review and tweak one’s plan but wholesale decisions can be dangerous. We would always recommend discussing these with a qualified financial adviser.
If one looks at different risk profiled investments over a 14-year time period, including the 2008 financial crisis and the last five years of doldrums of the South African equity market, our observations are as follows:
- Time horizon is critical when formulating an investment strategy.
- It is important to ensure liquidity over a minimum of five years.
- Time in the market is far more important than timing the market.
- Global exposure adds significant levels of currency volatility to a portfolio. Investors need to understand this additional level of volatility.
- Cycles will continue; therefore a properly diversified portfolio is the best way to manage cyclical risk.
- Investing in line with your risk profile is important, as this allows you to withstand volatility better.
- Diversifying globally is important but it is not a one-way street.
Unfortunately, many SA investors are switching out of balanced portfolios into income funds. Look at the 14-year number and ask yourself whether this is a good idea. The returns in a balanced fund over this period were 361% against high income funds of 205%. Maybe this will prove to be correct for the next month or the next year, but certainly not in the long term.
Investors are buying into global equities at the end of a bull run because this is where the returns have come from over the last seven years. Things are not always as they seem, and following a documented strategy is best. This may not seem relevant over three to five years but the probability of achieving one’s financial goals increases significantly using a clearly defined plan and a cool head. We always recommend that investors seek the advice of a qualified financial adviser to ensure their well-being.
Congrats to Siya, Rassie and the entire team. While we were shouting at our screens, you had formulated a plan – to give this beautiful country of ours hope by sticking to a solid strategy. The result was seeing the team holding aloft the Webb Ellis trophy. Investors should adopt a similar approach and stick to their own solid strategies.
Peter Rigby is the executive wealth manager at Alexander Forbes Private Client Wealth.
The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.