As Nelson Mandela said, once we’ve climbed a great hill we only find that there are many more hills to climb. When you’re looking up or down the hill, it’s easy to have a skewed vision of what’s really going on. We spend more time going up and down than resting at the top; it’s difficult to hold a level head in times of turmoil.
You may look at your bank statement this morning and see that there won’t be enough to cover your debit orders and upcoming expenses. This is scary! Conversely, you may see plenty of money and fear wasting it!
Money will always flow in and out; the longer we live and earn, the more we are reminded of this.
Whether your financial resources are lean or lush, you may be tempted to make some big moves to manage the coming months as wisely as you can.
When it comes to managing your investments it’s crucial to stay focused on the bigger picture – even when recent events may have you itching to move your investments out of the market and into cash. We need to keep a level head and not skew our vision.
The herd mentality, or groupthink, to ‘cash in’ arises from the fact that cash investments are readily available for use and are mostly free of investment risk. The low risk of a bank failing is essentially the only concern as they are investments on short-term, variable-rate deposits with reputable banks.
However, in an article published at the start of April 2017 in Personal Finance, Leigh Kohler, the head of research at Glacier by Sanlam (South Africa), explained that it’s important in uncertain times to remember that even though a cash investments may seem like a comparably safe option, the returns don’t often beat inflation. According to her, only once between 2001 and 2016, did cash investments outperform local equities and bonds.
Furthermore, if you had been invested only in South African equities over this period, you would have received an average return of 17.12%, compared to just 7.96% if you had only invested in local cash investments.
You are also taking two market-timing risks if you wish to move your investments into cash then back again once things have calmed down, and research shows that getting the timing wrong can be a devastating blow to your portfolio.
What should you do in lieu of making an emotional decision?
- Slow down your decision making process and include your trusted adviser;
- Invest in a combination of asset classes in line with your needs, time horizon, and risk tolerance;
- Invest in a suitable multi-asset fund;
- Ensure you have sufficient exposure to offshore assets;
- Understand and believe in your long-term investment strategy, then stick to it.
Scary times come and go – the burden of responsibility weighs on us regardless. How we protect and use our hard earned wealth and accumulated assets need to reflect what’s truly important to us, and not be a reaction to current trends and happenings.