SA investors cautioned against reacting to current market volatility

Steven Nathan, CEO of 10X Investments.

Monday, the rand plummeted to a new all-time low against the US dollar, while stock markets around the world experienced significant declines - hit by the growing concerns around declining Chinese economic growth.

However, according to Steven Nathan, CEO of 10X Investments, while market volatility is inevitable, it is critical that retirement fund investors remain calm, to avoid making irrational investment decisions during this time of turbulence.

Nathan says that our emotional reaction to volatility – typically expressed as fear and greed – tempts us to make irrational investment decisions. “We do this because, despite our best intentions and our awareness of market cycles, investors place too much importance on recent events and act in the belief that these developments will persist. This is called recency bias and it causes investors to buy high and sell low, which is the opposite of sensible investing.”

To overcome this recency bias, Nathan says that it is important that retirement investors follow an appropriate long-term investment strategy or policy that has a high probability of weathering all expected conditions to achieve the ultimate savings goal. “Setting the strategy upfront serves as a compass when the market is in turmoil, as a way to keep sight of the end goal, and a reminder to stay on course.”

He says that given the recent weakness in both the rand and the local stock market, South Africans may be tempted to move more money overseas. “Although momentum may seem favorable in the short term, it is impossible to say when this trend will reverse. Changing course now is tantamount to selling low (local) and buying high (international).

“We have had two instances in recent years where the rand has seen a dramatic collapse, in 2001 and again 2008. Both times, transferring money overseas during the decline would have been the wrong move, in terms of the subsequent currency and local stock market performances.”

“While it does not serve to fight the current momentum, the considered action is not to change the investment strategy, such as increasing the offshore allocation, but to wait for an opportune time to rebalance, as per the original investment strategy,” Nathan points out.

Nathan says that investors should respond to developments by rebalancing rather than react by chasing recent market trends. “This is also what objective and informed financial advisers will recommend to their clients at this time. They will keep their clients on strategy, rather than advocate an after-the-fact switch into a rand-hedge investment, or a move into a low equity portfolio.”