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Investment Lessons: Fear and Greed

Dec 14, 2016 | Financial Planning, Market & The Economy | 0 comments

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There is an old saying on Wall Street that the market is driven by two emotions: fear and greed. Although this is an oversimplification, it often proves to be true. Succumbing to these emotions can have a profound and detrimental effect on investors’ portfolios.

A year ago, we had Nenegate, which sent the rand into freefall. The New Year started with the fear of a looming credit downgrade, state capture reports, Nkandla, a Constitutional Court rebuke for the president, a fighting public prosecutor and the #FeesMustFall movement.

Certainly 2016 has been driven by fear, and we see this continuing into 2017. As an advisory business, we will not easily forget January 2016. Even with all our training, we were hit hard by the need to counter the palpable fear our clients were feeling. At the time, we were asked to comment publicly on the rand. It felt like we had been given the Springbok coaching job (well not as challenging!) Our advice was: “First, acknowledge how you are feeling. If you feel fear, and we all do currently, then you need to act slowly and deliberately or not act at all”. In other words, try not to let emotion get in the way of financial decisions.

What made the pervasive feeling of fear worse was that these conversations didn’t stop at work. At every braai or social occasion you attended, the same conversation came up, with forthright views like “the rand is definitely blown and never coming back…” and “It’s just going to get worse – get your money in hard currency.” It was difficult to argue against these viewpoints: fear had set in and was driving decisions.

From the point of view of our clients’ investments, we took comfort from the fact that we were well diversified in our portfolios, and because of this, they held up relatively well. The extra offshore exposure protected us to some extent from the weakening rand and gyrations in the markets.

We ended up talking people out of making big emotional calls like selling their homes and taking their money offshore at those rates. We reminded ourselves that in investing there is no such thing as a one-way bet (either way). We didn’t know how it would play out but if the rand strengthened, which looked unlikely at that point, then our portfolio would probably weaken. Diversification was key.

Remember that the rand was at R17 to the Dollar. Today, as we write this, it is R13.50. If you had made the emotional call and sold your home in January 2016 and put it into dollars, it would be worth around 20% less today.

Yet, the rand’s great gains, have also meant that the protection offered previously has now acted against the portfolio in the latter part of the year. When the rand weakened in January this year, our portfolios held up relatively well, because they had good offshore exposure. Most asset managers have kept this exposure quite high throughout the year, even though the rand has strengthened quite a lot. What that has meant is that investments in rand terms will look less because the portfolio has held hard currency (Dollars). As the rand strengthened, the exact thing that saved us from big losses in January has weakened our position now.

Internationally, we had Brexit followed by Trump’s victory, neither of which were expected. Over long periods of time, nations do go through periods where they vote badly in the short term so this is not an isolated incident. Populist voting may well spread in 2017 to France, Germany, Austria and the Netherlands. All these countries will have elections and the right wingers are getting excited and hopeful.

In 2017, we need to remember the lesson on fear and greed. Unfortunately, we cannot know what the year will bring, but we must act deliberately: acknowledge our emotions, remember to concentrate on those aspects of our finances that we have control over and make decisions without emotion.

2017 is the year when political events will trump economics (excuse the pun).

Have a wonderful holiday with family and friends and get plenty of rest for it looks like we are going to need all the energy we can muster next year.



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