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The importance of a ‘weatherproof’ investment strategy

19 August 2021 PSG Asset Management

These are confusing times for investors. By way of analogy, it may be fair to say that investors are experiencing a harsh winter and may be wondering how to ride out the storms brewing on the horizon. However, the ideal portfolio should not be structured for one season only but should be able to withstand a multitude of market conditions.

This is the opinion of Anet Ahern, CEO at PSG Asset Management, who elaborates: “For example, when the winter arrives properly in Cape Town, it inevitably brings a few storms. It will rain, there will be some flooding, the wind will howl, and it will be cold. But, despite dark and wet mornings, we do not materially change our life plans because of (predictably) poor weather conditions. Rather, we understand this is just a season, and that things will change again soon.”

However, she says that no matter how sanguine individuals might be about the weather, few can apply the same level-headedness to investments. This is a great pity, since markets have storms (corrections) and seasons (cycles) too.

“Investors often do the most damage to their long-term wealth when they allow market movements to derail their investment plans. The irony, of course, is that the nature of market mood changes is well-known and often discussed – just like a typical Cape Town winter. Despite this, many find it impossible to adopt the same bigger picture approach that allows us to make it through months of gloomy weather without derailing the rest of our lives.”

The question is why investors continue to fall prey to emotions driven by market events, when we anticipate that these will occur at some point in time.

Ahern explains that the divergence between the analytical and the emotional aspects of investment, may well be at the heart of why we continue to fall foul of our investment ambitions. “This divide between the ‘rational’ and the ‘emotional’ has been studied extensively, and we have names for them: investment biases. From confirmation bias, to anchoring, to loss aversion, to recency bias and the bandwagon effect – investment biases have been proven to exist time and again, even when standard economic theory says they should not.

“As investment professionals, we have seen it all and understand that most often, investors struggle to remain emotionally detached from their investments. Markets often produce contrary signals. No market recovery, or trend, ever moves smoothly in only one direction, and although the long-term trend in the stock market is generally up, there are many corrections, dips and periods of sideways movement along the way. Market weather is just as variable as Cape Town weather. This makes it easy for investors to second-guess themselves, doubt their own logic, give up and abandon their plans. This is most often when investment mistakes are made,” Ahern says.

She says that as investment professionals, “weatherproof” investment portfolios rest on research, debate and remaining true to a tried and tested process. “The ideal portfolio should not be structured for one season only, but be able to withstand a multitude of conditions. A cornerstone of good investment decision-making is having a sounding board to challenge biases and prompt investors to think rationally amidst uncertain economic times.

“There is no substitute for the rigour and analysis that we apply to every investment decision made, and ensuring that we contribute to a more robust overall portfolio strategy for our clients in the long term. It is only weighing our decisions using multiple measurements, debating our views and sticking to the metrics and processes agreed to upfront, that enable us to remain focused on the longer-term picture, even in the midst of inclement market weather,” Ahern concludes.

Quick Polls

QUESTION

Do you believe this is the toughest period for financial advice in many years?

ANSWER

Yes, it’s hard to navigate the challenges and difficult to adapt. I’m struggling.
No, I have managed to navigate the challenges and have adapted. I’m good.
50/50. I just feel like whether we like it or not, we have to ready ourselves for change… be resilient and scale for the future. It’s not about survival of the fittest anymore but survival of the quickest. We just have to move on with life.
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