Investment lessons from the pandemic

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By Charize Beukes*

Charize Beukes

The past two-and-a-half years have seen South African households suffer financial pain and economic upheaval that will be remembered for decades to come. It is easy to forget the strict COVID lockdowns that prevented us from buying anything from alcohol and cigarettes to flip-flops.

The net result was a sharp decline in economic output in 2020 of -5%, as well as a dramatic fall in markets followed by an unusually speedy recovery. And since last year we have had to try deal with rising inflation that was been made all the worse by Russia’s invasion of Ukraine.

To say that we are living in interesting times would be a major understatement, and one we would all rather have avoided. Unfortunately, that is not possible, although there are some key learnings we can take from these events. Especially in view of the new headwinds that hit global markets since the start of this year – war in Europe, higher inflation in several countries, and rising interest rates.

Here are five of the most crucial steps to take to prepare your finances against future shocks:

1. An emergency fund is crucial

The importance of having savings in an emergency fund was brought home with dramatic effect by the lockdowns that robbed many households of their regular income. Suddenly, the wisdom in the age-old advice to build up reserves in case of an emergency became all too clear.

While we are often told to build up savings that will cover household expenses for three to six months, the extended duration of the pandemic might cause us to rethink that framework. Whether that is possible will depend on your personal circumstances.

I suggest thinking of your emergency fund as a form of insurance for your long-term investments, because you will not have to sell investments to cover the monthly bills.

2. Set aside savings for market upheaval if you are retired

Historical data shows that it can take up to 10 years for markets to recover to previous bull market levels after a bear market. That timeframe is less of a concern for young investors who have time to recoup any losses, but retirees simply do not have that luxury.

The danger for retired investors is that drawing from your investment funds during a market downturn could result in significant, and permanent, value destruction.

That fate can be avoided by having sufficient savings put aside to tide you over and lower the amount you draw from your retirement investments. If you do not have this buffer, then a properly diversified portfolio can help to reduce your risk.

A balanced portfolio that is less exposed to risky, volatile assets is one way to achieve this. Unfortunately, many retirees are too heavily invested in growth assets as they try to extend longevity of their savings. Market dips like in March 2020 and the first half of 2022 would have seriously tested equities-heavy retirement portfolios.

Rather than focusing on performance, I suggest you look at rebalancing your risk according to your life stage and financial goals.

3. Do not let debt drag you down

Many South Africans who live paycheck-to-paycheck were hardest hit during the pandemic. Those who were out of work faced the prospect of not being able to pay their monthly bills, causing many to use high-interest loans and credit card debt just to survive.

With interest rates having risen to pre-pandemic levels as the Reserve Bank fights rising inflation, indebted families are now being crushed under crippling interest rates and mountains of debt.

Their first priority, then, is to reduce their debt while scaling back on household expenses so that they can dig themselves out of a debt hole.

4. Time in the market beats timing the market

This is another age-old saying that has been proven true time and again. Research shows that investors who stay invested for the long term in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.

It is nearly impossible to predict when markets will turn, and if you sell assets in an attempt to avoid losses you could just as easily miss out when markets rebound. For instance, J.P. Morgan Asset Management analysis notes that the second worst day of 2020 was followed by the second best day of the year.

If you had panicked and sold when markets fell, there is every chance you would have missed recovering some of your losses the next day.

Source: J.P. Morgan Asset Management analysis using data from Bloomberg

5. Do not wait for a crisis to plan your finances

The blowout from the Covid 19 pandemic caught many investors off guard. Our advisers at Brenthurst Wealth experienced an influx of clients wanting to implement a financial strategy based on fear.

What this showed us is that many have not given enough thought to their investments until the crisis hit. But suddenly there was a flurry of activity as investors realised, they needed to review their financial plans, including looking at their portfolios, the performance and costs associated with them.

By contrast, investors who had a pre-Covid financial plan were more confident in their strategy and had faith in the financial decisions they had made.

All is well that ends well

Despite the turmoil that we have seen since the beginning of 2020, all indications are that South Africans overall are showing remarkable financial resilience. Despite the financial knocks many investors have taken, there is light at the end of the tunnel – and no, it is not a train!

The graph below illustrates how stocks have rebounded after large two-quarter declines (think January 2022 – June 2022).

While past performance is no indication of future results, we may be seeing better days for the second half of 2022.

Brenthurst Wealth

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