Wealth Perspective Second Quarter | A word from the CIO

Tip #1: Understand the arena

When you’re in a difficult situation, it’s easy to view the past in a rosier light. We tend to forget that markets don’t move steadily, progressing without any dips (that is a fallacy). In fact, there is an inherent cyclicality to markets as they blow hot and cold. More often than not, today’s winners will be tomorrow’s losers, and vice versa. Not all asset classes move in union, making it a rarity for all portfolio assets to underperform simultaneously.

Tip #2: Be vigilant

A golden lining to market drawdowns is that entry points become more attractive and affordable. And as markets are cyclical in nature, the bounce-back is inevitable. Graph 1 shows the last three major recessions/market drawdowns for the FTSE/JSE All Share Index (ALSI) and the S&P 500. Interestingly, the bounce-backs are significantly longer than the declines. To make the most of the recovery, you need to already be in position when the market turns. Graph 2 on the next page shows the best 15 days since the Covid-19 fall, and if you missed those, you would definitely have suffered a substantial loss.

Remember, you should always be vigilant about what you choose to invest in – just because a company is cheap doesn’t mean it’s a good investment. For this reason, PSG Wealth has teams of analysts who investigate the best options available, to generate the best risk-adjusted returns in our products.

 

Graph 1: JSE All Share versus S&P 500 since 2000

Graph 1: JSE All Share versus S&P 500 since 2000

Source: PSG Wealth research team

Graph 2: Time in the market versus timing the market

Graph 2: Time in the market versus timing the market

Source: PSG Wealth research team

Tip #3 Act with calm

A 2021 study by Statista found that global consumers “spend an average of 463 minutes or over 7.5 hours per day with media”. We live in an era where we’re exposed to content more readily than ever before and, to some extent, we are expected to react impulsively to what we consume. So don’t beat yourself up if you start to panic when you see the sea-saw of markets – especially when there are big declines (or even gains). However, remember that it’s dangerous to act while in this panicked state. Impulsive financial decisions can destroy the value you’ve been building. When taking financial action, you should do so rationally, logically and calmly. This is where a financial adviser plays a critical role.

Tip #4 Stick to your plan

The biggest risk to any savings plan is not having enough money when you reach your end goal. The ups and downs before you reach the end are merely milestones. More than market volatility, the two biggest aspects that affect the end goal are time and investment contributions. For example, when investors pull back on risk appetite during market volatility without increasing their contributions to counter the reduced growth, they inflict severe losses on their investments. You cannot dial back on growth and not simultaneously understand the responsibility you, as the investor, will have to make up with additional contributions to your savings.

Table 1 illustrates the correlation between time in the market versus contributions. Assuming a set 6% interest rate, with the aim to retire at 65 and draw R20 000 a month for the next 20 years, an investor would need roughly R2.79 million at retirement. An investor who starts putting away about R1 000 a month at the age of 20 will save around R1.34 million more than the person who starts saving R1 000 at age 30. Thus, to counter this loss, the 30-year-old will need to increase their monthly contribution to almost R2 000. The lesson to understand from this is that less time you spend in an investment product, the more you will need to contribute at a later stage to make up for the shortfall.

Table 1: Retirement scenarios

Table 1: Retirement scenarios

Source: PSG Wealth research team

Tip #5 Diversify

Financial author Sam Beckbessinger asked which is better – investing R10 000 in one company or R1 000 in 10 companies? Albeit simplistic, the answer is clear that if the R10 000 company performs poorly, so does your investment. However, if you construct a diversified portfolio that is tactically over- and underweighted in specific areas, you can hedge against mistakes made in the market. In this way you manage the greater risks while still achieving your investment and savings goals.

Tip #6 Don’t go solo

In times of stress and uncertainty, know who you can turn to, such as a trusted financial adviser. PSG Wealth advisers are backed by world-class research teams, providing them with access to well-constructed solutions that produce consistent above-average performances at below-average risk while maintaining a competitive price – as shown in Graph 3. Our financial advisers are also qualified to create an investment plan suited to your specific needs, and can advise you on the best way forward (or remind you of your investment plan) during market turmoil.

Graph 3: PSG Wealth Creator FoF – drawdown versus sector

Graph 3: PSG Wealth Creator FoF – drawdown versus sector

Source: PSG Wealth research team

So, rest assured that you can upcycle and/or recycle your shoe boxes as desired, without tasking them with safekeeping your savings or investments.

 

PSG Financial Services +27 (21) 918 7800

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