Its always easy to look back and say, “we should have done this or that”. Hindsight is the perfect science. This is often so true for most investors, especially with greed and fear being the biggest detractors from making sound investment decisions. If only we could predict the future, we would all be rich. Not really, but it reminds us that predicting the future (as shown with the Pandemic) is very difficult. History will not show us the future, but we can learn from it to help us improve our decision-making processes.
A recent article from Allan Gray lists many lessons from the pandemic, but more specifically, it highlights the difficulties of navigating a way through an unforeseen crisis:
Stick to your targeted asset allocation – When markets are falling, it is hard to know how much further they will go down, and therefore when to start buying. Having a process of periodic rebalancing provides an advantage of automatically buying when prices are low or selling when prices are high.
Sometimes, go with the flow – The enormous monetary stimulus injected into markets may have material long-term negative effects. But at the time, it reduced short-term risks, driving a wave of new money, which is still propping up markets.
Distinguish between the facts and noise – Often easier said than done. Information overload plays havoc with your emotions, making it difficult to remain rational.
Keep a clear head when there is panic – Seeking understanding of the situation is paramount, which experience can fast track. Stick with your investment philosophy, have the courage to stay the course. Irrationality will not prevail forever.
The long-term view should be kept as the focus – Opportunities arise where basic market relationships are irrationally skewed. An example is the effect of the collapse of the oil price on Nigerian banks, which also collapsed, only to rebound sharply, providing large investment returns.
Don’t be afraid to sell too soon, or de-risk – We are in abnormal economic times as governments have pumped in trillions of financial aid to prop up economies. Many are fearful that this has created the next investment bubble, and one never knows when it may burst. Selling or de-risking “too soon” can be painful, but many great fortunes have applied this principle.
Admit when you are wrong – This should not be done when an investment moves against you or an investment is not performing as desired. Rather re-evaluate your decision when there is evidence that something has changed.
Ensure you have a proper financial plan – We conclude that when investing, it is important to ensure that the right processes are in place which will assist you to successfully navigate times of unforeseen crises. Start by putting a proper financial plan in place, which will include assessing whether you are taking on the appropriate risk to achieve your goals and suit your personal tolerance.