Andy asks: What would you advise a person in my position to do with the bit I am trying to save so as to hedge the risk of a depression. Gold is something that comes to mind — even though expensive at present.
I have hopefully made provision for sufficient income on retirement (in a diversified portfolio) that would cover a bit more than my current monthly costs. I continue to save 15% income each month as I no longer have a pension fund.
Maya replies: Before commenting on your investment portfolio, I recommend that you see a financial planner so that you know whether or not your current retirement provision is sufficient. This will also guide you as to how much risk you may or may not need to take with your investments.
Market risk vs inflation risk
There is a concern that people are invested too conservatively as they fear another market correction. The problem is that if you sit out the market too long, you miss out on the growth that you will need to fund your retirement and eventually inflation eats your nest egg away. What may come as a surprise is that over the last five years, which includes one of the greatest market crashes in history, equities still outperformed all other asset classes.
Over the last five years the average high-equity prudential fund (balanced fund) delivered 14% on average, while a low-equity prudential fund delivered 9%. Over five years that equated to a 28% difference in your final investment value. Over 10 years that would mean a 63% difference in return.
Probability of a depression
But people are understandably concerned about where the world is headed. The overwhelming view is that we are in for a long, slow, protracted recovery. Scenario planner Clem Sunter believes there is a high probability that we will experience a U-shaped recovery with a “corrugated bottom”. In other words, there will be stops and starts along the way. If you analyse the economic data from this year so far, his scenario appears to be playing out. What he is not giving a high probability to is another recession.
Returns in a slow-growth environment
In a slow-growth, low-return environment you will need to look seriously at growth assets to at least eke out some return. Fund managers believe our current market is fairly priced — it is not expensive but it is not cheap either. They believe that if you invested a lump sum today, you should still see positive returns over the next five to 10 years even if there are short-term fluctuations.
Select the price, not the market
However, they believe that trying to second guess where the market will be in six months’ time is a fool’s game — if it continues to rise, when do you make the decision to re-enter? If it falls again would you have the guts to re-enter? Research shows that attempts at market timing have a very negative impact on returns as people seldom guess it correctly. One should rather be driven by price than predictions. Therefore investing with a fund manager who has a strong value bias would be a good start.
As investment gurus tell you, you cannot control the markets but you can determine the price at which you buy your investment. If you are buying a good investment at a low price, over time you will see returns, irrespective of the market’s short-term movements. Select an asset-allocation fund that can move between the various asset classes so that the fund manager can move defensively if he or she is concerned about market valuations and a possible market correction.
Investing in gold
With regard to gold, you need to keep the currency in mind as that has an enormous impact on your returns. The price of gold in rand terms has actually depreciated in value over the last few years. The price of a Krugerrand is a good example: at the beginning of March 2009, Krugerrands were trading at around R10 299 and the gold price was trading at $940. Krugerrands are now trading around R9 000, despite a gold price of around $1200. That is a 13% negative return despite a 28% increase in the price of gold. The difference in the price movements is the rand/dollar exchange rate. So a decision to invest in gold is also a view on the rand.
The rand’s strength has partly been due to the weak performance of the developed-economy currencies and a move by global investors to invest in emerging economies. However, many pundits expect to see the rand weaken from these levels. If we were to see a further market crash, there would be a flight to safety and the rand would most likely weaken significantly as it did in 2008 — so a gold play in that scenario would possibly pay off.
Whether or not we will see another market crash is an impossible question to answer and reminds us of why there is a stock market in the first place — it is largely just a betting ground for people’s views, and some will be right and others wrong. Having a diversified portfolio that includes gold but is not only invested in gold, would be a sound strategy.
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