What view should the investor take during political and financial upheavals?

Finally one of the worst political chapters in South Africa’s history has ended with the resignation of the scandal-plagued President Jacob Zuma. But not before he, one final time, plunged the country into much uncertainty. For weeks he played cat and mouse with his political detractors in the governing ANC as South Africans held their breath, the world looked on and markets hovered nervously.

Now Zuma’s successor and the man who was key to his removal, President Cyril Ramaphosa, will start the long and arduous process of cleaning up after Zuma, restoring political stability to and confidence in the country, and getting the economy growing again. But in politics as in the world of finance, there are no guarantees of success, and volatility could rear its ugly head again at any time. Yet hope springs eternal that Ramaphosa is the right man for this difficult job.

One of Ramaphosa’s first tasks now will be the delivery of the State of the Nation Address, a vital precursor to the presentation of the national Budget on February 21. There is talk too of a much-needed cabinet reshuffle; even that the respected former finance minister, Pravin Gordhan, could be brought back. The markets are likely to applaud.

This signals a long-overdue fresh breath of air after almost a decade of Zuma’s unstable rule during which, as we all well know by now, state coffers were being looted, the country lunged from one scandal to another, and from one crisis to another. The rand plunged to some of its worst levels, credit ratings downgrades reached junk status, and periodically enormous losses were suffered on the Johannesburg Stock Exchange.

Ever since Ramaphosa succeeded Zuma as ANC president in December, the rand gained in confidence, yet periodically still fluctuated nervously as the uncertainty in the stand-off between Zuma and the new ANC leadership prevailed. And even now, despite the outlook being positive after Zuma’s resignation, the aftermath of this political drama could still produce some uncertain or nervous moments going forward. As a parting shot Zuma somewhat ominously warned the new leaders of the ANC that a crisis could emerge that they “will regret”.

Be that as it may, the point is that South Africa’s recent history clearly illustrated how political volatility and uncertainty can ricochet in the financial arena, with predictability becoming the art of the unknown. Other recent political events like Brexit in the UK and its impact on markets also brought this home.

 

What must the investor do?

So, as a high net worth investor, what does one do amidst so much volatility and uncertainty? First, it is important to understand that volatility is a normal and unavoidable part of investing. Just as the financial markets have for various reasons moved dramatically as long as stocks and bonds have existed, political volatility and shocks have also been around for ages. Both affect the investor and are often interrelated. But in both cases resilience and positive interventions always seem to eventually triumph in the longer term.

For this very reason panic reactions are not the way to go, even though it is human nature, even for risk-takers, to get nervous when things become unsettled. And while periods of volatility and uncertainty are good reminders that one needs to regularly reassess one’s portfolio and adjust, if necessary, one’s investment strategy, it is important to take a long-term view.

When crises, whether in the financial markets or in the political arena or both, appear to drag on unresolved, knee-jerk panic reactions equal a short-term view that could cost an investor dearly in the longer term.

Selling during a down market in times of volatility caused by political or other factors, will more often than not result in at least a short-term loss. But the loss could easily be a long-term one and it will be extremely hard to know when to get back into the market. Investors who wait too long could suffer even further losses, and their long-term goals may go unrealised.

At Carrick we believe it is extremely important for financial advisers to design their clients’ portfolios in such a way as to help them withstand the impact of inevitable periods of market volatility that come along from time to time, whether caused by political or other factors.

The key lies in selecting an appropriate asset allocation for your portfolio, with a mix of stocks and bonds that is the right one for each individual investor to realise his or her long-term goals, also taking into account the potential for periods of volatility. Largely sticking to this investment plan can help deliver better investment results over the long term.

That is not to say that it should not also be flexible enough to make adjustments if and when necessary. For this reason, it is important to regularly sit with your financial adviser and assess your investment plan to see if it is still on course towards your long-term goals. But always take the long-term view and avoid short-term panic reactions.

Taken individually or together, different asset classes and sub-asset classes each play an important role in any investor’s portfolio in reaching one’s goals. In a bear market, for instance, bonds can help reduce the risk of stocks, thereby potentially reducing losses. However, if you have selected the right mix of stocks and bonds at the outset, sticking with your plan will deliver better results in the long term.

But diversification is not just about asset classes. By investing offshore in different geographies and currencies you can mitigate risk by not being fully invested in a single currency.

Nonetheless, periods of volatility – whether political or financial – are always a good reminder to consult your financial adviser, take stock, reassess and make adjustments if necessary. For more information on how to best balance your long-term goals with short-term volatility, you can contact one of Carrick Wealth’s qualified advisers at wealthmanagement@carrick-wealth.com.