Total eclipse of the heart

When coming up with an investment strategy, it is best to invest with your head taking emotional feelings out of the equation, but external noise influences our choices. In essence, we need a total eclipse of the heart.

It has been a few weeks since the referendum in Britain, and a Brexit vote which has caused major uncertainty in the markets. Before this event, we had our own Nenegate debacle and this was only a few months ago.

The only constant in our markets seems to be radical uncertainty. Understandably, investors are feeling insecure and most likely want to make changes to their investment portfolios.

Hard lessons learned

The way in which you structure your portfolio over the long-term is vital. You need to ask a lot of questions about what you want and need from an investment before you go ahead with it.

What are your goals? What is this money for? When will you need this money? In answering these questions you are able to structure an investment rationally without letting the noise in the market affect the decision.

We can all clearly remember how we felt and how risky the South African market seemed during the period after our former Minister of Finance Nhlanhla Nene was fired. A lot of investors sold out of the South African market and invested offshore, one of the worst investment decisions in the short-term.

The Rand was over R18 to the Dollar and international markets were expensive. International markets have since tumbled and the Rand has recovered below R15 to the Dollar.

Focussed attention

Focussing clients on the following factors would have assisted clients through this turmoil and helped them avoid the big mistakes:

• Asset allocation: an investor needs to align asset allocation with their specific personal circumstances. Asset allocation determines the long-term growth, the volatility of the investment and the level of risk within the investment.
• Time horizon: for an investor with a longer timeframe, a higher percentage of his capital can be allocated to growth assets; keeping in mind that these are the assets that move along with markets. It is important to understand whether the investor can handle the volatility or appreciate the risks taken or not taken, as in this case their returns will be lower than that of the market.
• Offshore investments: this should be addressed as a diversification strategy, rather than a fear-based one. It is important to have offshore assets, but if you live in South Africa and spend your money here, your income might fluctuate considerably every year if all your assets are offshore.
• Diversification: if an investor is well diversified over different asset classes, countries and sectors of the market the investment should be able to weather most storms.

Of course there are many more issues that an investor should look at, but you need to make rational decisions when choosing an investment strategy and then you need to stick to it.

Those investors who stuck to their plan during the Nenegate saga came out of this event in a financially stable position. The markets are up and the Rand is much stronger. Those who had knee-jerk reactions are most likely regretting the changes they made.

Will Brexit be different?

Unfortunately, nobody has an answer to this question. Britain leaving the European Union is by far a bigger event than the firing of a South African Minister of Finance.

As a South African investor, a lot of the safe-havens have become very risky indeed, but this could change within a short period of time. Nobody has a crystal ball and this will not be the last occurrence of this kind.

If you have a well-structured investment portfolio, you should not have to react emotionally to market events. Plan well and stick to the plan.