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By Maria Smit*
As Russian tanks rolled into Ukraine last week, investors the world over were fully justified in wondering about the impact on their portfolio. In the hours immediately after the attack started markets were in decline, but within 24 hours some recovery was already evident.
Predictably, precious metals like gold soared, as did other commodities, including oil and European gas prices. But certainty is still far, far away.
The good news is that data from the past 30 years shows us that stocks actually bounce back after geopolitical events like terrorist attacks to wars. According to a recent report, US stocks rallied an average 4.6% in the six months after such crises dating back to 1990, rising 81% of the time.
That is not to say markets are without risks in these uncertain times, but you also do not have to be fully exposed to all risks.
Here is my advice on how to build protection into your investment strategy at this time:
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Take it easy
A war and uncertainty in global markets could not come at a worse time for South African investors who had been cheered recently by a strengthening rand.
This is because of the appeal of offshore markets at a time that the domestic economy is limping along, with returns from global markets outstripping local returns.
The conflict in Europe, however, may cause South African investors to withdraw their cash, or not invest at all. My advice is: do not do either.
If you are invested in the market, leave your funds untouched because you are likely to lose more than you will gain from exiting at this stage.
And if you are still allocating money offshore, maybe do so in smaller increments into a diversified spread of assets and do that over a period of time instead of all at once. In this way you are not exposing all your capital to the geopolitical risks, nor are you shying away from the markets completely.
Getting into markets during dips is one of the best ways to capitalise when markets recover.
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It is all in the timing
I am not referring to timing when to get into or out of the market. As any astute investor knows, trying to time the market is a fool’s errand because you can never tell when market prices are going to move up or down.
The timing I am referring to is your investment horizon.
If you are going to need your retirement savings in the medium term – say in the next three years – then this is not the time to be taking unnecessary risks.
In fact, it helps to know if you are going to need income or have planned expenses in the next three to five years because you can construct your portfolio accordingly.
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Diversify, diversify, diversify
Even though all portfolios that we create for clients are purpose-built to their needs, the one common denominator is broad diversification across and within asset classes.
For instance, if the aim is to achieve capital growth over the long term, we will allocate more funds to growth assets. We can do that when their time horizon is seven or more years because we know that not all funds or asset classes deliver the same returns through the different phases of the market cycle.
A properly diversified portfolio should not have to be adjusted during times of unrest and uncertainty like what is currently unfolding in Ukraine, because such market cycles will have been anticipated in our strategy.
Sitting back and doing nothing in volatile times is never easy. But it is the right thing to do.
And if you are still not convinced, speak to an accredited, qualified financial advisor who will be able to help you navigate these uncertain times.
