Great time to invest for risk smart minority – BJM PCS
Markets uncertain; equities volatile, rate rises hurting sentiment, property values and listed property … what a promising scenario for investment!
That’s the possible perspective of a wide-awake minority of risk-aware investors that is moving to new levels of financial planning insight.
This challenge to mainstream investor ‘wisdom’ is perfectly logical, says Barnard Jacobs Mellet Private Client Services (BJM PCS), the unit of the BJM Group that manages the wealth of some of the most affluent families in South Africa.
“In the current environment, most investors focus exclusively on market risk,” says BJM PCS director Sunel Veldtman. “A better-informed minority with a more holistic view will consider at least five additional risks – inflation risk, interest rate risk, diversification risk, credit risk and liquidity risk.
Better appreciation of a wider risk spectrum frequently triggers some surprising insights.
Veldtman explains: “Someone concerned about inflation risk and associated longevity risk who is on top of liquidity risk might very well see our current investment climate as the answer to a prayer.
“Following the herd and retreating into cash might be ill-advised if you are highly exposed to inflation and longevity risk – especially if you have sufficient cash reserves to address liquidity concerns.”
The re-emergence of inflation as a structural threat in many economies coincides with increased discussion of longevity risk as a growing number of middle class families benefit from good nutrition and better health.
“The risk of outliving their capital worries many 50-something salary-earners,” says Veldtman. “A successful executive or entrepreneur no longer thinks he has five to eight ‘Golden Years’ in retirement and will then die.
“Planners increasingly have to look 20 or 30 years beyond traditional time-horizons.”
Individuals taking a long view see their investment build-up in a new light. “And often they don’t like what they see,” says Veldtman.
Those concerned by the risk of outliving their assets tend to look for ways of growing capital over the next five to 10 years.
Converting equities into cash and entering the money market suddenly seems inappropriate as cash has a poor inflation-fighting record. In addition, many investors get caught in interest paying investments for too long – in the last cycle we saw panic when interest rates hit their lowest levels.
Equity and property during a major correction may seem like long-term growth opportunities rather than no-go areas.
Says Veldtman: “Good advice and astute selection of value opportunities is a prerequisite for successful contrarian behaviour, but the key initial step is wider risk appreciation to get a balanced picture of where your true interests lie.
“It seems odd, but big market retreats could be just what you need … or not, depending on the results of a holistic view of risk. Unfortunately, the average saver-investor rarely steps back to check the big picture.”
