Staying the course

Andrew Morton, Head of Advice Philosophy, FNB Financial Advisory.

Staying the course, sticking to your guns, keeping a level head and removing emotion from investing are philosophies which underpin the long-term success of any well-structured and well-balanced portfolio. This principle of patience is vitally important for the individual investor, particularly during challenging times.

With the United States presidential primaries well under way, there are a number of anecdotes doing the rounds which centre on Republican front-runner and his estimated US$40 million inheritance from his father in 1974. Donald Trump’s current wealth has been estimated at US$4.1bn by Forbes and US$2.9bn by Bloomberg. However, reports suggest that had Trump invested the US$40 million into the S&P 500 index funds, he would get US$3bn today. Investing the US$200m in wealth Forbes estimated Trump had in 1982 into those same funds, the presidential hopeful would have US$8bn today.

This analysis reinforces the impact, over time, of staying the course and remaining true to your financial goals. Of course, you have to start with a solid roadmap or plan which is based on where you are on your financial journey, where you want to get to and which investment strategy you and your financial advisor have earmarked as the best route for you to travel in order to arrive at your desired goal.

An outcome-based investment strategy targets a specific return over a pre-determined period with careful consideration of asset allocation, volatility and drawdown risk in your portfolio. This is to achieve smoother returns over time in order to ensure your peace of mind while navigating the pre-determined route.

Once this has been done, besides minor adjustments along the road, the most important job the investor has is to ‘stay the course’. But holding your nerve requires steel when markets are in turmoil. We are all emotional beings, which is why it is your adviser’s responsibility to take the emotion out of the decision making and review process and apply a rational and scientific thought process in planning to achieve your goals.

The danger creeps in when investors tune into local and global headlines trumpeting the likelihood of double-dip recessions and global downturns. Clients hear these doomsday scenarios, discuss them at cocktail parties and panic.

Let us also consider the example of a successful young entrepreneur who sold his business in 2010 for R10 million and invested the full amount that same year with R3.5 million allocated to an offshore US dollar-based multi-asset strategy (making use the foreign investment allowance) and R6.5 million into a local multi-asset portfolio.

In 2012 this entrepreneur was spooked by talk of a double-dip recession and wanted to sell the entire portfolio and leave the lump sum in cash until the threat abated. His wealth manager conducted an analysis, highlighted the protection afforded by a well-diversified portfolio and stressed the importance of staying the course; which, ultimately, the client did.

As it turned out, the world did not enter a double dip recession, in fact global markets did very well over the subsequent three years, and the JSE All Share Index went from 33500 points to a high of 54000 points three years later. Should the entrepreneur have exited the markets in June 2012 he would have missed out on exceptional growth during this period.

In 2013, with the rand at R10 to the US dollar, the client was again concerned about his offshore portfolio. Once more, after meeting with his wealth manager, the client elected to stay true to his well-diversified and structured offshore portfolio. By 2016 the rand was trading at R16 to the greenback.

The wealth manager in this case prevented his client from making an emotional decision, and completely the incorrect one. The value added by this wealth manager is very difficult to quantify, but making some conservative assumptions could be approximately R4 million, or 40% of the client’s initial portfolio over a five-year period.

The role of a financial advisor is, of course, more complicated than simply removing the emotion from investment decision making. A professional advisor understands that one cannot time markets or currency movements, but needs to stay invested.