Lessons learnt from unprecedented times

By Nic Andrew

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