Successfully navigating your way through post-downgrade market turmoil will require a clear head and a solid long-term investment strategy . Andrew Davison , a member of the Actuarial Society of South Africa ’ s Investments Committee , cautions that now is not the time to panic , as kneejerk decisions are likely to result in poor investment outcomes .
“ If you have put in place a well thought through investment strategy based on your long-term goals , there should be no need for sudden changes to your investment portfolio ,” he says .
He notes that investors who panic and try to time the market by switching their portfolios into cash are likely to lose out on periods of market recovery and growth . “ Market timing hardly ever works . Typically , investors panic and sell when volatility has already impacted negatively on performance , thereby locking in their losses .”
“ During the lifetime of your investments , there will be times when some of the investment vehicles underperform . That does not mean , however , that you have made a loss . Only when you sell your units do you realise any gains or losses . For the rest of the time these are only true on paper .”
Therefore , says Davison , make sure you have time on your side when building an investment portfolio . “ Time buys you the luxury of absorbing short-term stock market volatility .”
To illustrate , he points out that the JSE All Share Index ( ALSI ) delivered returns of 13 % per year in the five years to the end of December 2016 , despite economic weakness and events such as the removal of Nhlanhla Nene as Finance Minister and the shock Brexit announcement by the UK .
However , this return only benefitted those investors who stayed committed and rode out the volatility over the fiveyear period .
“ This is not the first time we have been sub-investment grade , or faced investment risks . In the 1970s the market fell by as much as 60 %, and it took almost a decade to recover . This can be uncomfortable and can test investors ’ resolve , but the important thing to remember is that ultimately the market keeps grinding higher over time ,” he says .
“ If you don ’ t have a clear plan in place , then you should treat this as a wake-up call to set your investment goals and develop a sound long-term financial strategy .”
Davison adds that if you are saving towards your retirement for instance ,
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you should have an idea of how much you need to accumulate and your time horizon .
“ Remember that your time horizon is not to retirement , but should extend into retirement . The exact end date is uncertain because it is actually for your lifetime .
“ If you have a clear plan , you will then have chosen specific portfolios for a reason , and when events such as a downgrade happen you will be able to remain focused on what you are trying to achieve .”
He notes that good advisers play a valuable role in managing their client ’ s investment behaviour by taking the emotion out of investment decisions .
He offers the following additional tips for managing investments in the months to come :
1Seize investment opportunities Davison points out that weaker share prices may offer investors many value opportunities , enabling them to purchase more shares with any new contributions they make towards their savings . If you are saving towards retirement then you are making a regular contribution from your salary every month . This means that you automatically benefit from rand-cost averaging , buying more shares when prices are low , and fewer shares when prices are high .
“ The turmoil associated with a downgrade may lead to volatility in various sectors and even without changing anything , your monthly contributions may be buying stocks at more attractive prices . When these
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recover you are likely to benefit from the returns .”
Diversification is key
2 Diversification is key to achieving the best possible investment outcomes while minimising your investment risk , states Davison . “ This means diversifying between different asset managers with different investment styles , as well as between different asset classes , sectors and regions .”
He notes , for instance , that if you already had offshore exposure built into your investments , then you will have benefitted from rand weakness .
Many investors may have this exposure through portfolios such as Multi-Asset portfolios that can allocate assets to foreign stocks . Also , many companies on the JSE do have exposure to markets other than South Africa , so this provides some additional diversification .
“ If , however , you were invested predominantly in a portfolio with insufficient diversification , such as a sector-specific fund investing only in Financials or a domestic-only fund , then you should re-evaluate whether your strategy truly will be able to withstand significant turmoil . If you have doubts , contact your financial adviser to take the appropriate corrective steps .”
3Consider your retirement plan carefully If you are nearing retirement , consider delaying your retirement if possible since each extra year worked is one year less to rely on your savings . “ Boosting your retirement savings
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and lessening the amount of time you will need to rely on these savings could have a profound impact on your retirement outcome .”
He urges investors with living annuities to ensure that they are maintaining a sustainable drawdown level , as preserving their retirement capital will increase their financial resilience to withstand lower returns .
“ A sustainable percentage will depend on your age , gender and marital status , but should not be more than 4 % for someone newly retired at the age of 65 years .”
Boost your savings
4 With the cost of living expected to rise and interest rates likely to increase , Davison emphasises that it is vital you build resilience into your finances by carefully managing your expenses and prioritising your savings . “ Pull back from spending to the limits of your income and save at least six months ’ salary as a buffer against unforeseen expenses or financial shocks ,” he suggests .
He warns that tax rates may also rise as a result of additional pressure on the government ’ s budget , and suggests taking advantage of tax incentives through additional contributions to your retirement fund or to a tax-free savings account .
Andrew Davison , member of the Actuarial Society of South Africa ’ s Investments Committee
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