Lessons learnt from unprecedented times

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- Now is the perfect time to reflect and learn about yourself as an investor
- Honest reflection is an excellent way to become more self-aware, to learn about the consequences of one’s actions, and to improve future behaviour
- Using the time to reflect and learn from our reactions can help us improve as investors and increase our chances of achieving our financial goals
An unprecedented speed of collapse of markets in March.
An unprecedented
global pandemic with extraordinary economic and social impact. An unprecedented
quantity of resources deployed to find a medical solution. An unprecedented response
from governments around the world to stimulate the economy. And an
unprecedented recovery in markets through April and May.
‘Unprecedented’ is probably the most over-used word in the
past few months and yet, in many ways, for good reason.
Howard Marks, the founder of Oaktree Capital, wrote an
excellent memo to his clients in May titled “Uncertainty”.
He quoted Ian Wilson former Chairman of GE: “No amount of sophistication is going to allay the fact that all of our
knowledge is about the past and all your decisions are about the future”.
He also quotes Neil Irwin, senior economics correspondent at the New York Times:
“It would be foolish amid such
uncertainty, to make overly confident predictions about what the world economic
order will look like in five years, or even five months”.
Two quotes which I think neatly sum up the current
situation.
So, if you recognise that the future is uncertain and that
it is vital to have the intellectual humility to acknowledge that the
environment is very difficult to forecast, what can you constructively do?
Gain insights from
self-reflection
Now is the perfect time to reflect and learn about yourself
as an investor. Because the decline and subsequent bounce-back were so quick
and recent, you have a rare opportunity to reflect on how you felt and what
your emotions were over the past few months.
Did you feel fear and panic or were you calm? Were you glued
to the TV and social media, watching the latest stats, market moves and
headlines? What were your sources of influences and who did you rely on to find
your truth? Did you have strong opinions on issues and did this remain constant
or change frequently?
Experiencing these emotions are completely natural, but each
of us reacts differently in such circumstances and so the really important
thing is to understand how you personally
reacted, and how this might have influenced (and continues to influence) your investment
behaviour.
Did you sell assets
and move to cash after prices had fallen? Did you see the decline as a bargain
and invest more in growth assets? Did you feel uncertain, freeze and do
nothing? Did you move money offshore after the Rand collapsed? Did you revisit your financial plan as a
source of reassurance? Did you engage your financial advisor to help you as a
trusted coach?
Honest reflection is an excellent way to become more
self-aware, to learn about the consequences of one’s actions, and to improve
future behaviour.
Investment lessons
learnt from reflection
Having had the privilege to reflect personally, and engage
with many clients, colleagues and advisors, here are some useful insights and
recommendations:
·
Make sure you have a documented investment plan –
and include in this plan some of your natural tendencies (biases) identified
above for reference purposes. This will help you recognise which emotions to
guard against and which emotions and behaviours stand you in good stead.
·
Make sure that your time horizon and exposure to
growth assets (equities and property) is clearly articulated in your plan as
well as the consequence of holding these assets (e.g. expect to outpace
inflation comfortably over the long-term but will fall on average 30% every
five to seven years). This will help you stay the course during the trying
downturns.
·
Don’t try to time the market. This is extremely
difficult to get right and very few of the “gurus” who switched to cash before
the crash, re-invested and benefitted from the bounce. Most who try this, end
up getting their fingers burnt.
·
Make sure that your portfolio is well diversified
across asset classes, companies and geographies. This really helps manage the
volatility of the ride, which in turn encourages you to stick with your plan
and means you are more likely to get to your destination.
·
Where possible, try to accumulate at least six
months of living expenses as emergency savings which you can use if required.
These should be invested in a low risk, highly liquid, money market (or
similar) fund.
·
Find an advisor who you trust, who has your best
interests at heart and who can act as your behavioural coach in challenging
times. It is in such times, that good advisors really earn their fees.
Using reflection to help
navigate the future
These are challenging and uncertain times and it is likely
that they will continue for the foreseeable future. But while we wait for
clarity and the new normal to settle in, we are not powerless to the
circumstances. Using the time to reflect and learn from our reactions can help
us improve as investors and increase our chances of achieving our financial
goals.
Roger Federer, the greatest tennis player of all time is
known for how he has constantly improved his game over the years. After losing
a rare match he said to reporters, “Sometimes you win, always you learn.”
I encourage you to engage with us as you reflect on the
insights of the past few tumultuous months. I also remind you to stay in touch
with us via our client services centre, website or our social media channels to
ensure that you are up to date with our latest online tools, podcasts, articles
and investment information to help you stay informed.
Yours in self-reflection
Nic