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By Sonia du Plessis*
The first few months of the year have given many investors reasons to pause and reassess their portfolios amidst global market volatility. After surviving the ruin caused by the coronavirus, many investors had hoped the worst was over, only to be confronted by rising rates, the threat of stagflation and war in eastern Europe.
One of the most important lessons you can learn as an investor is that market volatility has to be embraced. In the absence of volatility, prices would be stagnant and so would your portfolio growth.
The markets have been anything but stagnant over the past two years but having survived them it’s time to look forward and plan how you can update your portfolio to adapt to the continued volatility.
Consider these three steps:
It’s all about perspective
Reassessing your portfolio composition and how that matches your risk tolerance is a habit that’s worth developing. It is advisable to review your portfolio risk during turbulent times to reassure yourself that your plans remain on track.
If you’re closer to retirement age, then it makes sense to balance your portfolio with amended exposure to high volatility assets like listed equities. Bonds and other fixed-income investments might not offer the most exciting returns, but preserving your savings is a far higher priority at this stage of your life. At retirement, there should be a definite shift in an investor’s outlook – a move from getting high growth, in your portfolio, to rather preserving what you have built up. By saying this, I am by no means advocating shifting totally out of growth assets. The main aim should be the preservation of capital compared to taking on excessive risk to get exceptional growth. Retirement is not the time to gamble with your hard-earned money.
The size of your retirement pot also has a big influence on your risk profile. If you have a sizeable retirement pot, then you can comfortably take on risk. If, however, your retirement pot will about just cover your income needs, then you really can’t afford much risk.
On the other hand, if you still have a good long while before retirement then the long-term nature of markets plays in your favour. Short-term market volatility tends to fade into insignificance over longer periods, so your main priority is to remain invested and to keep investing.
In either event, it’s worthwhile to align your risk appetite with your portfolio composition on an ongoing basis, not only during high-stress times.
Stay focused on the long-term goal
It might not feel like the right response when markets are going up and down like a yo-yo, but your best strategy is to ride out market events.
Movements up and down affect the value of your portfolio, but only for that specific moment in time. That means that you only lose money if you sell when the price is lower than what you paid. And if you’re investing for your retirement, then the only moment in time you should worry about is the day that you retire.
So, your best response is to ignore short-term events and resist the urge to act. Another lesson that experienced investors can teach novice investors is to always have some cash on hand- to buy market dips. If you want to take any action when markets do fall, then picking up quality stocks at discounted prices makes the most sense.
Diversify your risk
This is the golden rule as far as investment advice goes because it still rings true: the best way to reduce your risk is to spread your eggs across multiple baskets.
Depending on where you are in your investment journey, it might be more appropriate to hold less volatile assets like bonds and fixed income. The outlook for South African income funds is still much better than what investors are currently receiving in money market instruments. It really does not make sense to have large amounts, of cash, just sitting in the money market. There are better alternatives. The forecast for some of the income funds used by Brenthurst Wealth is in the region of 9% per annum. Do note, however, that this is not guaranteed.
Also, don’t discount the value of the one asset class that always performs well during troubled times: gold.
This can be used as a short-term hedge against further market declines but be careful of being overweight gold in your portfolio. Gold, like other asset classes, can fall just as easily as it climbs in uncertain times so use gold to balance your risk, not increase it.
The lower asset prices in a market dip are also the ideal motivation to further diversify your portfolio by buying quality shares at attractive prices.
Balancing your portfolio with your risk appetite is always recommended. In times of high volatility, however, be careful to make decisions based on your future plans rather than your current emotions.
Speaking to a qualified financial advisor can help set you on the right path with a plan tailored around your immediate circumstances and future priorities.
- Sonia du Plessis, CFP®, is Head of Brenthurst Wealth Stellenbosch.