Stick to your investment plan despite market noise

Paul Stewart, Head of Fund Management at Grindrod Asset Management.

In times of market distress such as we are seeing at present, the disconnect between financial planning and asset management industries becomes even more pronounced than usual, says Paul Stewart, Head of Fund Management at Grindrod Asset Management (GrAM).

By its very nature, financial planning is a long-term pursuit and requires a sensible plan to be made well in advance. Importantly, the investor and advisor require resolute determination to stick with the plan, regardless of the market noise along the way.

Stewart says, “Looking at markets currently, one could easily become distracted from the financial plan as capital losses are mounting and it’s very tempting to move into cash.” Global economic uncertainties have persisted into a seventh consecutive year. Increasing geopolitical risks have recently manifested themselves in escalating conflicts in the Middle East and terrorist attacks in Europe and Africa. In South Africa, our economy creaks under the weight of a growing debt burden, slow economic growth, high unemployment and inept political leadership.

Any of these events in isolation could have the potential to cause uncertainty and jitters to financial markets. But the fact that many of these issues are occurring simultaneously has placed an increasing amount of pressure on investor confidence. Investors who prefer - often incorrectly - a safer risk and return relationship in the short run, have opted to exit markets and prices have consequently fallen sharply in the last quarter.

“For the financial plan to be successful, an investment strategy aimed at meeting the long-term objectives of the plan needs to be implemented by the asset manager. The asset allocation they select is the principle issue here,” says Stewart.

“Unfortunately too many asset managers shy away from volatility to protect against short-term capital risk. However, for the long-term financial plan, it’s not short-term volatility but inflation risk that is always the most pronounced foe.” He says asset managers often become over cautious or over optimistic at exactly the wrong times.

“We believe that whilst all of the pressure points noted are important considerations, they should never outweigh the primary investment consideration of the financial plan, namely delivering long-term investment returns that are able to consistently outpace inflation.”

Stewart adds that, “GrAM portfolios have always been, and will remain, strategically positioned to deliver inflation-beating returns over the next three to five years. Given current yields, only equities and listed property have a high probability of delivering inflation-beating returns net of costs in the medium to long run.” This means that any price volatility experienced in these asset classes will have a direct short-term impact on capital values. Even though investors will see their capital values are probably lower than in the previous quarter, they must stick to the plan.

GrAM Payers and Growers® portfolios invest in high quality stocks that pay regular and dependable income streams. For investors saving for retirement, the income is reinvested on the investors’ behalf, by buying more units every quarter. Stewart notes that, “Right now, they are able to buy significantly more new capital this quarter as market prices are down.”

Conversely for investors in retirement, some or all of this income is paid out as cash to fund retirees’ living expenses. Importantly this means that retired investors do not need to sell their capital at the current discount prices to fund their retirement income.

Stewart says, “Income is the lifeblood of Payers and Growers® portfolios, and takes prominence over any short-term fluctuations in capital value.” A properly constructed portfolio means that volatility can be tolerated in the short run without investors having to lose sight of their long-term plans.

“In this way, the disconnect between financial planning and asset management can be narrowed or even eliminated completed if the asset manager and financial planner are talking the same language,” says Stewart.