/ 14 April 2011

How you should be investing in turbulent times

It is important to stress from the outset that the world is not fixed. Sure it is fixing, but there is a big difference between fixing and fixed.

So what should investors be most nervous of going forward?

Middle East disruptions spreading to Saudi Arabia. This could drive oil to $150 per barrel and beyond, thereby stoking inflation and with it interest rates.

  • There will be more trauma out of Europe. Spain’s needs are significant and they may well need help. If they need help and don’t get it, expect turbulence. However, given the fact that it is both within Germany’s interest and control, expect them to probably get the help they need.
  • Inflation is rising, driven by food and fuel. Expect rising interest rates, the extent of which will depend on these two factors and their impact on growth. In South Africa, in addition to food and fuel, we need to watch the rand as well. If the rand were to weaken substantially, that would also raise inflation. At this stage we expect two 50 basis point rate hikes before year-end.

So what should investors be doing during these troubled times?

  • Don’t avoid emerging markets. Yes, they are overpriced relative to developed markets, but they will grow faster and they will attract flows, which means that their equity markets should deliver reasonable growth.
  • Before you rush off to invest in Russia, don’t forget that anything that you own in South Africa already counts as an emerging market investment and is a portion of your portfolio.
  • Don’t try and time your movement between the various asset classes. You will cause yourself unnecessary stress and chances are you will be acting on emotion rather than fundamentals. Choose a good balanced fund manager. They will make the decisions for you; they won’t always get it right, but given their training, experience and access to information, a good portfolio manager should get it right more often than you!
  • Don’t avoid US equities or the US dollar. Both have had a torrid time for a very long time now, but this won’t be the case for ever, and there is a lot of bad news already in the price. Similarly with Europe. The US, Europe and the UK have already priced in a credit crunch, housing collapses, currency collapses, zero growth, poor if any equity performance, over-geared and sometimes bankrupt consumers, companies and countries etc. And they say you should buy when the news is bad not good! Yes, there is still bad news to come, but a lot of that is already priced in.
  • Don’t invest in schemes that promise fast and returns higher than everyone else, sold by companies with no brand or reputation. Too many people are losing their hard-earned savings to unscrupulous financial salesmen. There is no difference between a thief who robs you on the street and a financial services crook. The latter is generally better educated, sounds more erudite, dresses better and steals more. Beware, they are out there.
  • Don’t invest in anything you don’t understand. Chances are the salesman also doesn’t understand what it does, and if it all falls in a heap you will regret backing exotic products.
  • Most importantly, diversify everything. Don’t try and be too clever. Go back to basics; honestly assess your risk profile based on your financial circumstances, not on gut feel about where markets are going. Make sure your portfolio is appropriate to your risk profile – too many people adjust their portfolios based on what markets have done and expect them to continue doing the same, whether that is rise or fall, when often markets do the exact opposite.

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