DO WE NEED TO PANIC?

Or if you are, like most of us, dependent on the outcome of your investment strategies to achieve your goals and the markets go haywire as they currently do, then nobody can blame you for getting nervous and a little upset.

It is easy to start questioning the investment decisions you have made, and more so; if you have done the investments with the help of an advisor it is even easier to start questioning the rationale that was used to do the investments

Do we need to panic?

Panic is an emotion that is usually experienced when one lands in a situation where you feel that you have lost control over your circumstances. Like for example, if you go for a spin with an experienced racing car driver and he really takes it to the limits or the first time you go parachuting and so forth.

There are four main asset classes in investments, namely Cash, Bonds, Listed property and Shares.

  • Cash: this is the least volatile asset class and changes in returns are associated with the change in interest rates. Nett returns after tax are seldom higher than the inflation rate and therefor is normally not considered as an investment but rather a holding asset or somewhere to park your money while waiting for something.
  • Bonds: are issued by governments or bigger institutions and have guaranteed returns although not substantial.
  • Listed property: Value is based on the value of the property and the rental contracts.
  • Shares: the most volatile asset class. The value is based on the perceived value of the company that issued the shares and can fluctuate violently on the slightest rumours in the market. Over time however, this is the asset class that delivers the highest return.

These asset classes can also be local (South African) or off shore (Global) and returns are then further influenced by the change in exchange rates. Although offshore returns can be far less than local returns, it can be enhanced by the weakening in the value of the Rand against the USD, the Pound or the Euro.

The most important pillar of any investment is the reason for the investment, the goal, what is needed and when. That will determine the time available to achieve the outcome.

Income that is needed right now must be as conservative as possible while capital needed in 10 years from now can be invested more aggressively. However, if income is needed over a long time there must be a combination of conservative and more aggressive investments.

In determining an investment strategy, cognisance must be taken of the time frames needed to achieve the goals. If the strategy is built with an outcome in mind, then the character of the building blocks of the investment must be kept in mind. Aggressive investments included to achieve a goal over the longer term will be volatile at times and there will be times that the investment delivers lower returns than the planned return, but then again, there will be times that it will outperform the planned returns. If we can then expect certain investment portfolios to be volatile, do not panic when it is time for the rough ride!

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