Investment lessons for uncertain times

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Currently there are numerous political and geopolitical uncertainties naturally concerning investors. These include upcoming SA, US, and UK elections, as well as conflicts in the Middle East and Ukraine. Such reservations and concerns can heighten investor behavioural biases, resulting in emotional decision-making. We draw on a recent Allan Gray article looking at lessons on how to mitigate some irrational actions that could erode your wealth during periods of heightened risk.

1) No one can predict the future – Although this cannot be done with 100% certainty, attaching different levels of probabilities to outcomes is necessary when assessing the appropriate exposure that one’s investment portfolio has to different areas of risk. An example would be the various effects of the SA elections on investment markets. See our SA election predictors table below:

Outcome Probability Move in 2024
Estimated Investment Market View Investonline View SA Inc. * Shares Dollar/Rand
ANC Majority 5% 5% up 10% 18.0
ANC/EFF/MK coalition 25% 5% down 10% 25.0
ANC/IFP/Other coalition 60% 60% up 10% 18.0
ANC/DA coalition 10% 30% up 30% 16.5

*Banks, Retailers, Property, SA mid-cap Index.

2) Invest in preparedness, not predication – There are regular surprise occurrences that negatively affect investment markets, such as COVID or the 9/11 attack, which are commonly called “black swan” events. Although markets have rebounded each time from these shocks, these rebounds take time, and often conservative investors don’t have the means to wait for a recovery. Be prepared and check that your personal risk tolerance matches its appropriate investment strategy. As an example, a conservative investment strategy that cannot tolerate major shocks will have a suitable cash portion, which will add some important stability to the investor’s returns.

3) Change your attitude to volatility – Don’t confuse volatility with an error of judgement. To reap long-term rewards, one needs to take on certain levels of risk that are accompanied by volatility. Usually, high risk and high reward will be more volatile over time. And less volatility is true for low risk and lower returns.

4) Investing is a marathon not a sprint – Predicting the return period of a good investment is difficult, as value realisation can depend on many different factors. An example is the Platinum sector that was depressed for many years, until the market realised its limited supply had enduring value with long-term demands.

With current global uncertainties, ensure that your investment portfolio is properly balanced and adjusted to suit your personal risk profile to achieve your goals. Check that your financial plan is up to date. It is critical to ensure that the risk you take in your investment portfolio matches your financial plan, especially when nearing or during retirement.

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