While intuitively it doesn’t make sense, good news can have unintended negative consequences. We say this because these positive developments have pushed the R/$ exchange rate back to levels last seen three years ago. While this is a reassuring endorsement of our country’s turn-around strategy, it has the unfortunate side-effect of reducing the rand value of our dollar-denominated investments.
A total of 25% of the 10X High Equity portfolio is invested offshore for diversification purposes. The year-to-date return on the 10X International Equity class is accordingly minus 6,5%.
Beyond rand strength, we have also seen the return of plain old market volatility, something that has been scarce over the past few years. We have become so used to our market trading sideways and rand weakness pushing offshore returns higher, that we forget that although markets move onwards and upward over the long-term, they often lose their way short term.
R100 invested in the 10X High Equity portfolio on 1 January 2008 would have grown to R276 by 31 December 2017, net of fees. Yet the return on the 10X High Equity Portfolio was negative in 41 of those 120 months. Down-months are simply part and parcel of being invested in a high equity portfolio.
But you don’t know when it will happen so you can’t pre-empt it. It’s not unlike the turbulence you experience when flying. One moment you are snuggly sipping wine, watching a movie, oblivious that you are 13,000m above ground, trapped in a thin metal tube held up by little more than applied physics. And in the next you bounce off your seat, and the cabin shakes, rattles and rolls so hard you wet your pants (with wine). But you know there’s no need to panic: turbulence is a harmless and inevitable part of flying (which it is). It is also quite unpredictable, which is why airlines recommend you keep your seatbelt fastened throughout the flight.
All this applies equally to market turbulence. Every so often, investors are spooked by some or other development, and markets sell off sharply. No one can say when. But when it does, all you can – and should – do is tighten your seat belt and stay put. Yes, it’s unnerving, even for professional investors, but it poses no real threat. Just as your plane is designed to withstand the buffeting, so too is a sensible long-term investment strategy.
We had some of that market turbulence in early February. The catalyst was a report on US jobs figures, which showed wages growing faster than expected. This raised the prospect of higher US inflation and more interest rate hikes than the market had anticipated. It prompted a sell-off in the US share market, followed by corrections elsewhere, including South Africa.
In the space of three days the US S&P500 Index fell by 10%, its biggest slump in six years. It has since recovered most of those losses and is now just 3 percent off its all-time high. Our market also recovered half its losses and is now trading near the level at the beginning of the year.
The worst thing you can do is react to this and change your portfolio. Your savings are, for the most part, invested in the share market and exposed to these developments, so you may wish you held more cash at this time. But that would be short-sighted.
Share markets have delivered the highest return over time, but only at the expense of minor and major ups and downs in the short term. No one can predict when these will appear, and invest accordingly. As a long-term saver, you must tolerate the bumps, to earn the high long-term return.
During the Global Financial Crisis, the local stock market fell by almost 50%. At the time, many retirement investors abandoned equities or switched into a low risk (low equity) portfolio, believing this was the ‘safer’ investment strategy. But it was not safe at all – all these investors did was lock in their losses. They missed out on the strong returns in the subsequent nine years (the stock market more than tripled in value!).
And you also need to do nothing, because your retirement savings are protected. Our long-term focus takes into account that market upheavals happen now and then.
How does this work? Firstly, your portfolio is spread out over many different investments, which all react differently at these times. Secondly, if you are within five years of retirement, then you would be on our glide path and have lower exposure to the share market already, and be much less affected by these events.
Thirdly, if you are near retirement but still invested in our High Equity portfolio, because you plan to switch into a High Equity Living Annuity after retirement, then your portfolio has time in hand (either before or after you retire) to recover.
And lastly, if you are nowhere near retirement then what has just happened will not impact on your retirement income one day, because you, too, have time on your side to recover.
So the best thing to do is to ignore short term market volatility. That is what we do at 10X. We have set our plan upfront, we are confident it is the right plan, and we make sure we stick to it, especially at times like this.
