Hindsight is 20/20, as the saying goes – but learning from the past and present is key for anyone who wants to become savvier with their finances in the future. An industry expert offers five tips to help investors gain perspective in times of economic upheaval.
Investors – gain perspective to assist you to manage the impact of COVID-19
With the COVID-19 pandemic wreaking havoc on healthcare systems and economies around the globe and the nation on lockdown, Moody’s downgraded South Africa’s sovereign credit rating to junk status on 27 March 2020. It couldn’t have come at a worse time.
“But,” says Head of Product at Discovery Employee Benefits, Guy Chennells, “from every situation, no matter how hopeless it seems, there are always lessons to learn and reasons to hope.” Here are his top five takeaways for South African investors.
1. Start, or prioritise topping up your emergency savings fund
There’s nothing quite like a national lockdown to stress the importance of having an emergency fund. Its impact on income has made the point, loud and clear, that a stable job doesn’t exempt you from needing one.
An emergency fund serves as a safety net for unexpected expenses – in this case, an unprecedented global pandemic. Most financial planners recommend saving at least three to six months' worth of your expenses in the form of highly liquid assets. This amount may take a while to build up, but it’s well worth prioritising.
2. Double-check to make sure you’re sufficiently insured
It’s no surprise that people who have procrastinated on this front are now scrambling to get properly insured and struggling to do that during a lockdown. Calamity highlights the importance of having these bases fully covered, not simply ticking the box because you have some cover through your employer. If you don’t know how much insurance you need, try using an online tool or reach out to a financial adviser for a video consultation.
3. Make sure your portfolio is well-diversified
Global and local equities have both crashed, but with global equities in dollar and the rand plummeting, the net effect from a South African investor’s point of view isn’t that frightening, says Chennells.
“Together with relatively more stable bonds and cash, balanced funds have so far weathered the storm reasonably well, albeit with overall negative performance for the year to date. Diversification has meant losses of a few percentage points,” he notes, “but this is tolerable compared to the 23% one would have dropped by being fully exposed to South African equities.”
4. Be realistic: what goes down, can go down (even further)
The performance of SA and global equities, as well as SA property, has been dismal for the past few years. With so much bad news already priced in at the start of 2020, a big drop seemed unlikely. Then COVID-19 reared its ugly head.
The Johannesburg Stock Exchange (JSE) fell by 11% from the start of the year to the end of February. And then both the JSE All Share Index and the S&P 500 dropped drastically in the middle of March (over 24% and 29%, respectively, over just three weeks). This fact should ground us in realism: things can always get worse.
5. Be patient: what goes down, must (eventually) come up
The corollary of that, of course, is that things can always get better, and if you stay in the market, they undoubtedly will. History proves that over the long term, cash does not outperform the market.
While we may be in a period of poor performance, by bailing out or switching investments, you’ll turn a paper loss into a realised loss, and then you will miss the rebound. By 30 March 2020, the JSE All Share climbed up 15% and the S&P 500 climbed 16%.
Also bear in mind that central banks around the world have pumped trillions of dollars in quantitative easing (QE) into the world’s monetary system. “Plus, interest rates have been lowered in the world’s biggest economies,” Chennells adds.
“This means that there will be a lot of cheap money swirling around. Some of this will be pumped into the equity markets, which should drive prices up again. Even emerging markets like South Africa’s should gain from this.”
Whichever way you look at it, concludes Chennells, learning from the past and present is the healthiest action an investor can take.
Nothing contained here should be construed as financial advice
Discovery Life Investment Services Pty (Ltd), registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life insurance products are underwritten by Discovery Life Ltd, registration number: 1966/003901/06, an authorised financial service provider and registered credit provider, NCA Reg No NCRCP3555.