With elections around the corner, many may feel tense as the nation waits to see what’s next. In an environment of uncertainty, behavioural biases can creep in, with the temptation to make ‘knee-jerk’ investment decisions in reaction to the current climate and perceived market swings. Kingsley Williams, Chief Investment Officer of Satrix, suggests investing steadily and sticking to one’s long-term plan.
Timing the markets: A cautionary quote
Williams says Satrix’s philosophy is to focus on longer-term drivers of performance. This aligns with Warren Buffet’s famous cautionary quote on the dangers of timing the market.
The quote ends with this: “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”
This extract is often seen as potentially endorsing timing the market, but the full quote encourages the exact opposite. Buffet claims investors have had every opportunity to earn ‘juicy returns’ by ‘piggybacking Corporate America in a diversified, low-expense way’ through an untouched index fund. Instead, they jeopardised their returns by trading excessively or overspending on fund management, making portfolio decisions based on fads and tips, or adopting a start-stop approach to the market through untimely entries and exits. In short, Buffet suggests investors focus on steadily building long-term market exposure, and not timing entry and exits into and out of the market.
In a year where half the world’s population is going to the polls, investors would do well to heed Buffet’s words. Williams cautions people to be wary of being victims of their emotions and behavioural biases. He suggests staying the course and keeping costs low. Additionally, he advocates:
Resisting the urge to act: Much like constantly changing lanes in traffic, one’s best efforts may scupper one’s long-term goals;
Avoiding chasing past winners: Past performance is no guarantee of future returns;
Not being too defensive: The biggest risk to growing long-term wealth is not taking any risk at all.
Longer horizons and the magic of compounding
Williams says that elections bring the potential for heightened volatility, however, this isn’t necessarily an issue if an investor’s investment horizon is for the long term. “Investors who combine strategies with payoff structures that are not too highly correlated, and add time for compounding to work its magic, are stacking the odds firmly in their favour over the longer term.”
He adds that Satrix focuses on offering a wide range of asset class and investment strategy building blocks to enable clients to express their investment views. “These range from defensive asset classes in the interest-bearing space to a wide range of equity strategies more suitable for longer-term growth. Our preference is always to provide an appropriate investment strategy to match the investment horizon of a client and to meet a variety of different investment requirements.
“Research suggests that short-term tactical calls tend to detract more value than they add as they require consistently timing the entry and exit points correctly, as per Buffet’s quote. Being ahead of the market is not a trivial thing to get consistently right.”
Defensive strategies
However, Williams says that if clients do want more defensive fund strategies should they be concerned with short-term volatility and reducing short-term drawdowns, they could consider investing in money market funds, bond index funds or ETFs, low equity balanced index funds, or low volatility equity ETFs.
The recently launched Satrix JSE Global Equity ETF, tracking the FTSE/JSE Global Investor Index is another option, which provides investors with domestic equity exposure that weights inward- or dual-listed companies on the JSE according to their global free float. This provides a rand hedge equity strategy relative to broad market local indices, which could be an attractive proposition for investors who are concerned the rand may weaken.
ETFs and index funds can be an excellent diversifier due to the broad basket of securities they offer. However, understanding the index and investment strategy of an ETF or index fund and how this complements the rest of your portfolio is key to achieving true diversification.
Stay the course and match your portfolio to your risk tolerance and time horizon
Williams adds that it’s impossible to forecast how the elections may move the markets. “Forecasting these binary or probability outcome events is not how we approach investing. Even if we predicted the election result correctly, how the market may subsequently respond is still unclear. We structure portfolios to provide a through-the-cycle, well diversified mix of asset classes to match a particular client’s risk profile.
“Every asset class has its own risks, which is why a multi-asset class mix of both local and offshore assets is often the best solution. This can diversify foreseen and unforeseen risks and provides a smoother growth path to achieving above-inflation returns over the medium- to long term. It’s always important to match a portfolio to a client’s risk tolerance and investment horizon.”
The bottom-line? Align your portfolio with your risk tolerance and personal investment horizon. Stay the course, diversify your asset classes, and make the most of the magic of compounding. Be wary of tactically trying to time the market. In periods of uncertainty, a long-term outlook is likely to serve you well.
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