INVEST TEAM NOTE
We have compiled a list of questions that we have been receiving from clients over the last two weeks. We appreciate your contact with us at this time, please continue to touch base with your financial adviser via email, phone call, Whatsapp, Zoom and Skype. It is essential to make well-informed decisions and gain access to educational material for your investments at this time, should you be feeling uncertain.
Q1 How long will it take for the markets to recover?
As Warren Buffet, possibly one of the greatest investors of our time stated, we are to “be fearful when others are greedy and greedy when others are fearful.” In times as volatile as now, there is a lot of emotion driving the markets up and down. Separating what is fear and greed at this point is close to impossible. In times of uncertainty, the best thing to do is ‘hold the line and wait’. Unfortunately, there is never a specific timeline connected to the market and no one rings a bell when the market has bottomed. We believe that it is time IN the market, not TIMING the market that will ultimately lead to wealth creation.
Markets have sold off aggressively since the start of the year. The reason for the sell-off has very little to do with the way those listed businesses are managed or operated. It has to do with an external threat that is outside of the business management’s control. As COVID-19 affects the demand side of the economy, less people are willing to go to the mall and spend money, nor are they willing to go and buy that new car, go on holiday or make use of the entertainment industry. This uncertainty results in companies selling less goods and services, which impacts their earning capacity. This contributes to the sell-off in the share price.
This however, does pose an interesting opportunity in our view. Throughout financial markets, high quality assets have sold off sharply, providing an opportunity to invest in them at a discounted price.
To summarize, no one knows when markets are going to recover, but what we can do is take the opportunities that the sell-off has provided us and invest in high quality opportunities for our investors to benefit from in the long term.
Q2 Should I take my money out now and invest when the market starts picking up again?
As mentioned, no one rings a bell when the markets have actually hit their bottom and in order to successfully implement something like; “taking my money out now and invest when the market starts picking up again”, a person would need to be able to accurately time the market. Which, at this point and in history has proven to be near to impossible for the world’s finest analysts. The reason for this is because the market is not purely made-up of analytics, but also biases, opinions and emotions of the people who are invested inside that market. Sir Isaac Newton; inventor of modern calculus, Newton’s Laws, explainer of gravity and Principia, the movement of planets – an above average intelligent man. He made a statement which became a well-known quote, about the irrational behavior of investors participating in the market. He stated this quote after allegedly losing large amounts of his money during the 1720 “South Sea Bubble”. Before making the statement: he bought South Sea stock, sold it at a massive profit and then re-entered the market at a later stage when the market started to elevate again. At this time, the stock turned and its value vanished- he lost all previous profits and additional cash.
His response statement to this event was:
“I could calculate the motions of heavenly bodies, but not the madness of people”
The market is not acting purely on fundamental valuations and financials, but uncertainty of the times. It is for this reason that we would urge investors to remain invested and stick to their long-term investment goals. This too shall pass and those investors who were willing to remain patient, will be rewarded. Unless the cash withdrawal is absolutely necessary, now will not be the ideal time to disinvest. If we disinvest out of some opportunities that have sold off in the markets over the last couple of weeks and months, we lock in those losses.
Q3 Should I buy into USD?
The South African rand has depreciated more than 25% against the US Dollar since the start of 2020. This means that the dollar has become 25% more expensive. The moves are due to fears and concerns in global markets, with investors rushing into safe havens of which the dollar is by far the most attractive. In the past, gold was a safe haven. Contrary to history, gold does not seem to be rallying in these uncertain times.
In our view, the current concerns will eventually pass and money will flow back to opportunities where investors can get high returns on investment. As global growth recovers post the COVID-19 crises, the dollar should weaken against emerging market currencies again, of which the ZAR is by far the most liquid. Buying USD at this time might not be ideal, as it is already expensive and surety of the rand weakening further cannot be banked. Also, only buying USD at this time holds the question of diversification; “placing all of your surety eggs in one basket”. However, if you are interested in gaining exposure to global assets -which has also sold off during this time- please feel free to contact a Fairtree Invest consultant for the best way forward toward global assets.
Q4 Is this a good time to invest?
In our view, these are attractive times to be bold and to remain committed to your long-term investment approach. As investors, we need to take the opportunities the market offers us and at current levels, markets are offering some really nice opportunity. We would therefore recommend investors to get in contact with their financial advisors, to see where the opportunities lie and make informed decisions off of that. Fundamentally, before our clients invest, risk tolerance checks are completed with them. Risk tolerance research has shown that people are more sensitive to loss than gains. Investors are willing to take on risk if they stand to gain more, but not if they stand to potentially lose more as well. The application of the theoretical risk tolerance questionnaires which investors completed before investing, only truly gets tested during periods where they stand to potentially lose. During this time, some investors may have experienced losses and because of this want to sell assets. However, fundamentally according to their risk tolerances which were completed before they were placed inside their investments, now is a great time to hold the line and ride-the-wave.
Q5 If I am drawing an income, should I start withdrawing less now?
As the global economy goes through testing times and South Africa remains under pressure, these are times where all of us need to revisit our budgets and streamline our expenses. The more we can save in difficult times the better.
In saying this, our clients who are invested in the bucket approach do not need to stress, as provisions for income have already been made. We have created a video that explains how this strategy implements ‘safety’ and ‘growth’ of your capital simultaneously. The bucket approach allows investors to draw an income and not worry about market volatility for at least 7 years. As risky- growth assets are in a separate part of the portfolio, where the income is not being drawn from. If you wish to confirm your structure with your financial adviser please feel free to contact them.
We want to thank you for keeping in contact with us about your concerns and questions. Please continue to contact your financial advisor about investment opportunities at this time.
-Sybrand Engelbrecht & Kheara Kroggel