How to protect yourself in uncertain times

Wealthy individuals have a lot more in common than their wealth. Ambition, skill, patience, consistency, and a strategic game plan are vital to ensure success. Keeping their eye on the end goal and never giving up have been key to reaching greater heights.

“Only a minority of the population become extremely rich as the likes of Warren Buffet, Richard Branson or Paul Getty,” says Deon Nel, Head of Financial Consulting at Standard Bank. “But this does not mean that we can’t enjoy a comfortable lifestyle with luxuries and freedom.” 

“World stock market performances over the last 60 years reveal that the enduring trend is up and it is evident that the sharp downward movements often coincided with world calamities. Even with the peaks and valleys, stock market performance over time still yields inflation-beating returns for those who remain loyal,” says Nel.

“Despite this, investors are concerned about the fluctuating Rand and negative impact of the mining and metal strikes further retracting an already weakened economy. Hearing the words “hang in there” is not enough reassurance for those trying to save for retirement or financial independence,” says Nel. This in turn affects investors who feel the pinch whether it be through investment of stocks directly through their own portfolio comprising retirement annuities, pension plans, unit trusts or any other long term investment products which are exposed to the share market. 

Nel says, “The critical question is how you manage your income and investments to shield against market volatility?” He explains that there are two main strategies that need to be developed in order to provide an effective buffer against economic turmoil. 

The first is effective management of income and the second is a well-structured investment strategy. 

Effective Money Management 

South Africans are amongst the world’s lowest percentage of savers, averaging a minimal amount of 2% out of their salaries. It is estimated that the average South African spends 76% of their take-home income servicing debt repayments thereby relegating their savings plan to the back burner. These statistics are alarmingly high, revealing that only 5 in 100 individuals will in fact be in a position to maintain their standard of living at retirement. 

Nel says “It is little wonder that rising interest rates cause such widespread concern when so many people and businesses are exposed to excessive debt. If you take an average small- to medium-size business owner, he will probably have an overdraft of R100,000, two car leases totalling R300,000, a home bond of R1.5 Million and perhaps credit card debt of R50,000. In anyone’s book, this is a big chunk of money to repay before the school fees have been paid or the life policy has been covered. 

Nel says, “The first step to minimising the effects in uncertain economic times is to reduce debt. If you don’t have excessive debt, the impact of rising interest rates on your pocket will be negligible and it’s worth bearing in mind that if you have cash reserves, the higher rate will benefit you greatly.” 

Well-structured investment strategy 

The consensus amongst investment experts is to advise individuals to construct an investment portfolio in order to take advantage of long-term trends. If the long-term structure of an investment portfolio is healthy, short-term storms can be weathered. 

Nel says “The first defence against any volatility in the markets is diversification. What this means, is that investors need to ensure that their investment portfolio is structured in such a way that they have investments in different asset classes such as cash, bonds, property and equities.” 

Uncertainty and volatility are intrinsic to investment markets. For this reason, investment should be viewed as simply a means to having enough money to live the lifestyle that you would like to live. An investment portfolio should remain unchanged during times of volatility, unless the factors upon which the construction process was based have changed. Nel advises investors not to change a long-term game plan based on short-term volatility.  Attempting to time the market based on short-term movements only increases portfolio risk.

“The best way to protect yourself from market volatility is to first reduce your risk, which can be achieved by reducing debt. By doing this, you will have a lot less to worry about if inflation forces the Reserve Bank to push up interest rates. The next step is to ensure that your investment strategy has a long-term view. A financial planner will be your best resource when setting up a long-term portfolio,” concludes Nel.