Our economy had stalled, but at least it was ticking over. Now we are looking at a short-term contraction of, who knows … 10, 20 or 30%. The rand trading below R15 to the dollar seems like a bargain today; current exchange rates make the international travel ban moot for many.
If this was a normal economic meltdown, being diversified across asset classes would have offered some protection to investors in balanced high equity funds. Money seeking shelter from the stock market storm would have pushed into government debt, boosting bond prices.
But there is nothing normal about the current situation. Apart from the enormous contraction in the global economy, what with so many investors now needing cash, and governments around the world launching rescue packages funded by debt, almost everything was up for sale, including bonds. So even balanced funds did not provide the buffer they normally do. Only cash, and the weaker rand, softened the blow for local investors.
Although painful, it is nonetheless pointless to dwell on your portfolio performance right now. The immediate focus must be on preservation: preservation of lives, healthcare systems, food supplies, cashflow, financial aid and communication lines.
For those not on the frontline, our job is to behave responsibly, to conserve limited resources, and to take the necessary precautions to protect ourselves and others from the virus. If we take care of this now, our portfolio return will, in time, take care of itself.
Still, you may feel the need to preserve your retirement fund savings right now, by avoiding the slings and arrows of these outrageous markets.
Your long-term retirement plan would have called for a high allocation to equities in your investment portfolio. Historically, high equity portfolios have delivered the highest return for long-term investors, even over periods spanning world wars, the Great Depression, the inflation crises of the 1970s, the sanctions era, the dot-com crash and 9/11, the 2008 Global Financial Crises and the Zuma years.
Given the market turmoil we are going through, what with the JSE down 36% for 2020 at one point, it may not seem like the best plan. Yet despite the enormous setback we have suffered, the economy and share markets will recover eventually (and indeed, the All Share Index has already recovered half those losses). It will take time to get back on track fully, but as a long-term investor, you have time on your side.
Based on stock market history, sticking to your high equity strategy is likely to be the right thing do. This strategy always feels wrong during a crisis, but then seems obvious afterwards. As a long-term investor you should focus on your long-term financial goals, follow the right strategy to meet those goals, and not focus too much on short-term performance, either good or bad.
Of course, you could potentially improve your situation by switching into a more defensive portfolio now, holding mainly cash. In a bear market, as we have now, prices tend to go lower in stages, depending on the news flow. During the 2008/2009 Global Financial Crises, the JSE All Share Index eventually fell 45%. Then you could return to your growth portfolio later, when markets bottom.
Doing so is a big gamble, though, because you need to get your timing right, not once, but twice. If markets fall further, then yes, you could reinvest at a lower level. But if they don’t, you will merely lock in your losses.
Finding the right time to switch back is even harder. Equity markets turn well before sentiment does. Much of the ‘long-term’ return is earned in short spurts after these turning points. Missing out on the initial recovery can cost you many years of the ‘annual average return’. Or it may cause you to stay out of the market altogether, waiting for the next correction to get back in. Some investors have been holding out for that opportunity since 2009.
They have it now, but perhaps not the confidence to commit, not when there is again so much fear and uncertainty around.
So, rather than perfect your portfolio switches, perfect your long-term investment strategy: maintain your level of market risk, but avoid other risks that do not promise a higher return: trying to time the market, trying to beat the market with stock picking (use an index fund instead), and paying high fees in the hope they automatically translate into a higher return (they don’t).
The very reason to have such an investment strategy is to anchor your decision-making during difficult periods, to stop yourself taking the wrong action at the wrong time. The best thing you can do for your retirement savings right now is to act responsibly. This means protecting your money from unrewarded risks and sticking to the long-term plan.