Don’t fear uncertain times – focus on an investment strategy

There is a lot of uncertainty in today’s investment markets: drying up of US Fed stimulus, rising inflation and interest rates, economic impact and changes due to Covid – for to name a few. To achieve long-term sustainable investment growth, investors must understand the nature and purpose of each investment being made and their role as an investor:

1. Understand your goal and your horizon

Do you need capital protection and/or capital growth? Do you need to earn income? Do you need to use some of your funds in the near future? The construction of your portfolio and the asset classes selected should be determined by these questions. Your investment horizon will be the most important factor – any part of your portfolio that can stay invested for five to seven years can be invested in aggressive funds. If you have a shorter horizon for a certain part of your portfolio, it should be invested in conservative (one to two years) or moderate/balanced (three to five years) strategies.

2. Understand asset classes

The four main asset classes are cash, bonds, real estate and stocks – all of which can be found in local and offshore markets. Cash and bonds are considered more conservative asset classes and can be used to provide an element of preservation/protection against equity market corrections. You can expect lower growth but higher earnings (usually higher than money market). Real estate and equities can be considered aggressive asset classes used to generate long-term growth. Income comes from dividends and is generally lower than income funds (cash and bonds), but growth is higher over the long term. Not all stocks are the same and will offer different growth; it is important to understand which sectors and companies (equity) you own.

3. Understanding local vs offshore

Offshore markets offer a wider range of opportunities for investors, which can increase diversification and growth. This increases volatility as the rand/US dollar exchange rate fluctuates daily and contributes to the overall fluctuation of your portfolio. Offshore stocks are generally more expensive than local stocks, but a combination of the two makes sense for most investors. The percentage to be allocated to each will be determined by individual needs and risk profile. Local cash and bonds offer higher yields compared to their offshore counterparts.

4. Understand investment styles

Growth, quality and value are the three most common investment styles used by fund managers or thematic exchange-traded funds (ETFs). Each has its own characteristics, strengths and weaknesses – understanding these remains the most important.

  • Growth style – uses companies that innovate and grow very quickly, usually by using new technologies and rapidly increasing their market share. These stocks mostly trade at higher valuations. Examples here include Amazon and most tech stocks. Pro: You get exposure to the most innovative companies that continue to drive innovation and adapt to change. Cons: Trading at high valuations can be a “bumpy ride” for investors.
  • quality styling – uses companies that have reliable revenue streams, strong balance sheets, and sell “sticky” products and services. They can maintain profits through good and bad times and generate returns for investors by increasing their income over time. Examples here include Visa, Estēe Lauder and Nestlé. Pros: Steady, long-term growth. Cons: Underperformance in bull markets
  • Value Style – uses companies that trade at low valuations and are undervalued by the market. It is usually found in cyclical industries such as banking and mining. Pros: low valuations offer a good entry point; if the global economy recovers and inflation persists, these stocks tend to do well. Cons: Some industries/stocks are invested in struggling areas that don’t offer much innovation/long-term growth.

Different styles work well in different business cycles. It is impossible to timing the markets, so a combination of styles makes sense. Understanding the strength of each style and the needs of each investor can help them make specific choices and determine if you are overweight (overinvested) in a certain style.

5. Understanding fund managers

The options of different mutual funds and fund managers are vast and can be overwhelming. It’s the job of a good financial advisor to understand these differences and build long-term relationships with good fund managers who perform well over the long term. Not all fund managers are the same, even within the same “investment style”. There are many small nuances and differences. Understanding them – which an experienced and qualified advisor can help you with – will help you invest with a specific goal in mind.

6. Understand your role as an end investor

Stock market valuations are determined by human decisions to sell and buy stocks and are often based on fear or greed. Therefore, the markets will always be volatile in the short term and your growth will not happen in a straight line. By embracing market volatility and staying invested, you eliminate market timing risk and create a more resilient long-term return profile for yourself. But when you understand what you’re investing in and why, you’re better equipped to stay invested when the going gets tough.

One final note: with the US Fed reducing stimulus, interest rate hike expectations and Covid unknowns, we expect a more challenging investment environment. Now more than ever, it’s time to invest in diversified and resilient portfolios, controlling what you can and avoiding what you can’t.

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