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Managing your portfolio through COVID-19

by | Uncategorized

Allan Gray recently published an article which gives investors some good advice on how to manage their portfolios in this time of the global COVID-19 Pandemic.

Here are the main points they made. There is also a link to the full article at the end.

Undue focus on short-term “losses” can lead to decisions that are not aligned with your long-term goals.

  • It is understandable during this time of severe market uncertainty that you may feel compelled to check on your investment portfolio more regularly.
  • Studies have shown that frequent checking not only raises your anxiety levels but can also negatively impact your long-term goals.
  • This phenomenon is called “myopic loss aversion”.
  • Scientific studies show that our brain responds to financial losses in the same way it responds to physical pain. This explains why investors want to sell or switch their investments to avoid future pain when their investment value decreases in the short term.

Experience from 2008

We looked back at the last significant market correction in 2008 and what happened to theoretical investors who, during the Global Financial Crisis, panicked and switched to cash vs. those who remained invested and “held the line”. The clear result was that staying invested through the cycle produced the best long-term result – despite the fact that over the short-term being in cash may have felt better.

Where to from here?

The global outlook is truly uncertain. It is impossible to calculate when the South African stock market will recover. We don’t know for how long this situation will persist and we should all expect continued volatility over the coming weeks and months. Fear and negative sentiment are at record levels. So, what can we do?

  1. Focus on “investment truths”
  • The price you pay relative to the true worth of each asset is the most important determinant of future returns. Asset prices have fallen sharply. You still own the same businesses you owned three months ago; the prices of those businesses are just 33% lower. Remember, when we [Allan Gray] buy businesses on your behalf, we buy them for earnings and dividends that they will deliver over the next 10 years and not the next 12 months.
  1. Give your investment time
  • Try not to act impulsively. Historically, the best course of action in times like these has been to stay invested, even though it is extremely uncomfortable while you are experiencing short-term losses.
  1. Focus on your long-term goals
  • Well-considered investment decisions are based on your risk tolerance, investment horizon and investment goals; these factors should not change due to market movements. More often than not, trying to time the market leads to disappointment.
  1. Speak to your independent financial adviser
  • In our temporarily isolated world, this market uncertainty and the overload of negative information can make us feel overwhelmed and confused. When in doubt, reach out to your financial adviser and discuss any actions you plan to take regarding your investments.

To read the full article, please click here