By Gerard Visser, Financial Planning Consultant at Alexander Forbes
Economic uncertainty, political instability, technical recession, Trump and China trade wars, and market volatility – these are just some of the challenges investors have recently been faced with. Listening to the news about poor market performance, these issues can leave investors feeling nervous and cautious about investing their savings.
When clients express concern, I advise them not listen to corridor talk. Many investors might be wondering whether their investments are still in the right asset classes or if a new strategy is needed. You might also be tempted to sell or switch your investment before losing more money, however, many of these issues are nothing new. If you are investing and have a financial plan in place with allocations to asset classes that align with your long-term strategy, you will not need to change anything. In fact, you could be worse off making any changes to your investment plan – especially if it is a long term investment.
When setting up any investment, it is vital to know what the investment is for and for how long you are wanting to invest as this will determine the correct asset allocation to use for the best potential return for that period. Each asset class works differently and yields different returns for periods.
We have had a stock market for more than 100 years, and it’s never yielded anything but uncertainty.
Clients investing in portfolios where there is equity exposure need to understand that these do not do market timing. These portfolios are specifically set up to achieve a targeted benchmark, set out by the asset managers over certain rolling periods. The rolling period is the investment term which will potentially give you the targeted return for that time period.
Equities in portfolios specifically target real growth which gives more growth than just inflation over longer periods. For clients looking to make returns in a short period, perhaps three years or less, must understand putting any exposure in equities for a short period of time is risky, as equities are volatile. Therefore, the investor must take increase risks to achieve slightly higher returns in comparison to safer investments.
Cash and some allocation to bonds are a perfect blend for investors looking at a safe and short investment period in volatile markets, although keeping your money invested in these asset classes might not deliver any real growth over the long term. The allocation to equities for this period will add some uncertainty as the returns are not guaranteed and you can either be better off and the equities can add more potential for real growth, or have the opposite affect and eat all your growth or even into your capital.
We are currently going through a very volatile market and cash has outperformed local equities over a period of five years, meaning that at the moment equities are extremely cheap and it is a good time to increase equity exposure in your portfolios or to set up investments with higher allocations to equities.
At the end of the day it is a risk an investor must take to potentially increase their returns by having exposure to risky assets like equity and property. If these volatile times are not for you as an investor, try to concentrate on paying off your debt as fast as possible.
Have a diversified asset allocation with local and global exposure and understand that you need to be invested for certain rolling periods. This will help with the volatility and decrease some of the risk to bring investors closer to their investment goals.
