Investors urged not to make short-term changes to investments

Amid heated debate among analysts regarding the future direction of interest rates, investors are urged not to rush into adjusting their portfolio and investments, as this could have unintended negative effects on their long-term savings goals.

This is according to Anil Jugmohan, CFA, Investment Analyst at Nedgroup Investments, who says that while there might be a relatively small number of individuals who will have to make adjustments to their portfolios in light of their personal circumstances, investors should nevertheless be wary of the potential unintended consequences of their actions.

“Selling riskier assets to buy low risk assets might subsequently result in the investor not being able to outperform inflation over the long-term, however, their portfolio’s growth characteristics might become more stable,” says Jugmohan.

He says as long as investors perform a rigorous and structured process initially to select their asset allocation mix - according to their objectives and timeframes - they should not adjust their portfolio in light of recent interest rate scares.

Jugmohan explains that the impact of interest rate increases on asset pricing is largely determined by the expectations of market participants. He explains that during “normal” market conditions, the effects are usually an increase in demand for short-dated, money market-type instruments, as these instruments will yield more if the interest rate increases. “However, for other asset classes such as equities, property, offshore and bonds, there are a number of other factors which play a role in current pricing and subsequent returns.

“Investors are often ill-informed of these potential effects and feel more secure making adjustments to their portfolio. However, short-term changes such as this can affect the long-term balance of the portfolio when the market readjusts.”

He says it is crucial to ensure that the assets in a portfolio complement each other and enable the portfolio to perform fairly well in all market scenarios. This involves developing a thorough understanding of the assets that are being included into the portfolio along with understanding the way they react to various macroeconomic outcomes. “This will ensure that you aren’t completely surprised when an outcome adverse to your expectations occurs.”

Jugmohan urges investors to take the following steps in order to ensure that they adopt a rational approach to investing:

1. Obtain a thorough understanding of your future goals and objectives.

2. Evaluate your current life situation with respect to wealth, spending habits, debt, family commitments etc.

3. Carefully consider your ability to continue earning a stable income (if you are not already retired).

4. Objectively assess your relative skill, experience and success rate in making investment decisions.

5. Consult with a professional financial advisor to assist you.