In this update, Theo and Warren discuss portfolio management, what to focus on now as an individual and what to focus on from a financial planning perspective. Please follow the link below to hear what they have to say:
A note from one of our financial planners:
Covid-19 and your investments – what to do in a time of crisis?
Nick Murray, a financial services professional for more than 50 years, once said that “all financial success comes from acting on a plan. A lot of financial failure comes from reacting to the market.”
At Verso Wealth we are adamant that a financial plan is the foundation of any person’s finances and investments. Therefore, we agree with Nick when he says that acting on such a plan will lead to financial success. Before we give advice, we first establish your goals and objectives, then we assess your personal risk profile and then we start to look at the asset allocation and the investment vehicle (product) suitable to achieve your goals and objectives.
Having a financial plan linked to your goals and objectives will be the key when turmoil hits world markets: as it did with the Covid-19 pandemic. The JSE ALSI traded at a very respectable 59 001 on 17 January 2020 but started to go into a bit of free fall after the news on Covid-19 broke. The markets then went down within a month to about 37 963 on 19 March.
The general public started to panic. I observed this first-hand when a pension fund member decided to change his portfolio to a money market type portfolio because he had lost more than R700 000 of his pension fund balance. With his decision he made the paper loss a real loss and the money was forever lost for his retirement. He took the decision while he still had two years till retirement. He has other savings, so the income from his pension fund would not even be needed immediately when he retires. Please note that this person is not a Verso Wealth client although I tried hard to convince him not to go ahead with his decision.
Why do I mention this incident? Because investment success is almost totally a function of how one emotionally handles declines in the equity market, as opposed to how one’s portfolio handles them (adapted from a quote by Nick Murray).
So, we just need to wait and do nothing, and everything will be okay in a year or two? No, unfortunately it is not that simple. Let me explain by using my family as an example. Please note that the below examples and content are not an attempt to try and give you, the reader, advice, but rather a way of trying to show how different scenarios may be for different people. Each scenario will have its own plan and strategy. Also please be aware that your individual scenario will differ from the examples I use. Please call on your Verso Wealth financial planner to assist you with your own individual scenario.
Let me introduce you to some of my family members. I am married to Antoinette and we have two daughters. My eldest daughter’s name is Chanté. My mom’s name is Susan.
Antoinette resigned from the company she worked for at the end of 2017 and we decided to preserve her pension fund money in a pension preservation fund. Why? The goal with the money is to provide for her retirement. This fund lost 14% of its value in the last month. Are we concerned? No. Antoinette still has 11 years before she wants to retire. Looking at the history of past market crashes shows us the markets will return to positive territory and she can expect an average return of about 8% per annum after costs on this portfolio (based on her individual risk profile and strategic asset allocation). Are we considering changing the underlying funds? Again, no. The two funds she is invested in are tier one funds (funds of the highest quality) with good fund managers.
Now let’s consider my daughter. She is a second-year university student and I started a tax-free investment for her six months ago. She contributes 50% of the monthly premium from her pocket money. This is to create a savings culture with her. Chante’s investment lost 25% as at 23 March 2020. After the crash: I decided to teach her an investment lesson or two. The first one is based on history that shows us that financial markets always return to positive territory and then will grow further over a long period (she has 30 – 40 years before she will need this money). The second lesson is that when other people run away from falling markets it is a good time to run towards them. Good quality companies are available at bargain level prices. So, what did we do? We invested an extra amount. Between 23 March and 31 March her investment already improved by 10% and the loss is now only 14%. I have no doubt she will one day see the big difference this extra amount made and the value of buying low and keeping her investment.
My mom is now 75 years old and we invested her money 8 years ago in three portfolios. Portfolio 1 was invested more aggressively to achieve more growth. We reasoned that my grandmother (my mom’s mom) died at 88 years old and if we take that as benchmark, she will still have 21 years from 67 to 88. The second portfolio we invested conservatively but with some exposure to growth assets (equity and listed property). This money is available in the short term (within a year or two). Portfolio three we invested in cash and cash instruments (defensive assets) as this is the portfolio to provide her with her monthly income. Now let’s see what happened with the different portfolios after Covid-19 hit the South African markets.
The aggressive portfolio lost almost 13% in the last month but is still returning 4% per annum since inception of the investment (more than 8 years ago). The previous year showed that this portfolio can easily return 10% per annum. Why invest a 75-year-old person’s money in a higher risk investment? She has time before she needs the money due to her other investments. When we started the investment, we calculated that she will only need the money when she turns 80. Please note that this strategy will certainly not work for most 75-year olds.
Her second portfolio also lost a bit of value since there is a low percentage of growth assets in the portfolio. The portfolio still performed at more than 7% per annum since inception. The last portfolio is in cash and lost no value during this period.
What happened to my own investment portfolio? The portfolio grew by about 6% per annum for the past 3 years till 19 February 2020. In the last month, I lost about 15% of the value of my investments. I did not make rushed decisions. In fact, I invested more money in the underlying funds of the portfolio as I know that the markets will stabilise and will in the long term increase again. It was an easy decision because I have more than 10 years till retirement.
The message is therefore that when you save money towards a long-term goal, such as retirement, you can endure market dips such as the current one and the 2008 subprime lending crisis. As demonstrated above, market dips offer advantages when you are building up savings on a regular basis. You are buying assets of quality at cheap prices, that will gain value as markets improve again.
I foresee difficulties for those people retiring now and people already in retirement receiving an annuity or a pension. It is pensioners, rather than all investors, who are being hit the hardest. When you retire and live on an annuity income based on your retirement savings, it’s very different. When you are drawing income from your investments, you are reducing your capital at a far greater rate when investment markets collapse. Perhaps this is a time to consider strategies to be able to withdraw less from your annuity to make sure you are not withdrawing too much of your capital. Please contact your Verso Wealth financial planner to assist you.
Wessel Oosthuizen , CFP®