Dealing with uncertainty during turbulent times

Staying the course

Joannie Maass Senior Client Investment Specialist - Alexander Forbes Investments

Waves of negative news – the ongoing Russia/Ukraine war, resultant high energy prices, and high inflation – continue to hit financial markets and have spill-over effects that impact our daily personal lives. Times certainly remain uncertain and turbulent as we confront a tangled knot of challenges both now and into the future.

In South Africa, inflation remains high, and just recently (26 January 2023) the South African Reserve Bank hiked the interest rate by a further 0.25% to 7.25% – our highest interest rate since 2016. Bad news brings uncertainty, which means many of us may be feeling uncomfortable and worried about our financial futures.

Uncertainty can be challenging

Dealing with uncertainty can be tricky because we like to feel as if we are in control, but there seems to be very little we can do. So, where to from here?

It’s important to remember that your actions, not the market, is the biggest factor that determines if you will achieve your financial savings goals or not. Experience shows that attempting to make financial decisions based on guessing what market movements will be will most likely lead to missed opportunities or losses. Because we don’t know when financial markets will turn, these actions usually take place either too late or too soon before they work in our favour. What we do know, as history has shown us, is that markets do recover, but how long this may take is unknown.

Let’s look at what past insights can reveal about the importance of staying invested over long periods of time and not trying to time the market, especially in times of uncertainty.

Chart 1 and 2: When financial markets decrease in value along with your savings, it can be tempting to react by changing your investment portfolios or moving into a cashtype investment like a money market fund. People often move into cash or other similar investments when equity markets fall and continue this downward trend (the circles in Chart 1). Although cash investments can provide more stable investment returns, they are less likely to grow your money at the rate required to reach your savings goal over time (Chart 2). If you had disinvested from a growth portfolio made up of investments with more potential to grow, like shares (equity), it is likely that you would not participate in any market recovery and would lose out on all the performance growth gained over such periods.

Chart 1: Rolling 1-year South African equity returns over the long term (FTSE/JSE All Share Index – January 2000 to December 2022)

Chart 2: How R100 invested on 1 January 2000 would have grown in different investments to 31 December 2022

Table 1: Local asset classes’ success rate in beating inflation + 5% over different rolling periods months years

5 years

10 years

Source: Alexander Forbes Investments (as at 31 December 2022)

While having investments in cash could provide adequate protection and steadily grow your money in the short term, it could also compromise your ability to achieve your long-term objectives – particularly for people focused on better retirement outcomes. Equities have outperformed inflation, cash and bonds over different periods despite continued episodes of market falls and turbulence. Trying to time the market is always tricky. It has been shown that time in the market is more important than timing the market. Table 1 above further illustrates this point, as it shows the likelihood of achieving inflation-beating returns in the different local asset classes over the different time periods, with equities being the place to be over all periods.

Conclusion

Those of you who have Netflix may have started watching a new series called 1899. Without giving away too much about the story, the cruise ship changes course to locate another cruise ship that had been missing for four months. When they locate the ship, all sorts of things start going wrong. Had the protagonists stayed the course, they would’ve made it to their initial destination, without all the nasty surprises.

Veering off course by changing your investment strategy does not always pay off and chances are that you could miss your destination completely or it could take you longer to get there. Investment success comes from keeping your savings invested over long periods of time and contributing as much as you can to your savings each month. Stick with an investment strategy that helps grow your investment value by more than inflation over time and thereby improves the chances of you reaching your goals.

It’s easy to get emotional about our money and investments. We can all do with some help to stay the course. We are facing unprecedented challenges in today’s markets. Before you make any changes to your investments, make sure you have the necessary information, understand your options, and ask for help from a qualified financial adviser. People who receive financial advice can make the most of what they have, understand the importance of committing to an investment strategy that is appropriate for them and have the best chance of reaching their goals.