by | Nov 1, 2022

The year 2022 will go down in history, unfortunately, for all the wrong reasons. Just when humanity thought that the world was done throwing curveballs, 2022 uttered the proverbial “Look Mom, no hands!”.

So, what exactly has happened. Well, bluntly, everything short of Armageddon has happened. We have seen war in Europe for the first time since 1945, 77 years after the second World War came to a close, a war between a global produce supplier (wheat and grain from Ukraine) and a European energy giant (oil and gas from Russia). The S&P 500 has found itself in a bear market twice this year, once on the 13th of June (-21.83%) and again on the 30th of September at -25.25% (lowest of -25.43%) along with the Dow Jones also in a bear market (lowest of -21.48%), luckily back home the JSE All Share has fared well compared to global markets, only reaching a low of -12.42% on the 29th of September. We have seen the highest inflation rates in the last 30 years in the UK (10.1%) and the USA (9.1%). Xi Jinping is helping worsen economic woes while maintaining his 0% Covid-19 policy, shutting down massive cities in China to further impact the global supply chain out of the workshop of the world. On top of all the economic woes, Former Prime Minister Liz Truss and Fed Chair Jerome Powell are treating their respective economies like space shuttle testing grounds, trying to beat inflation with tax cuts for the rich and famous in the UK and interest rate hikes in the US taken from a playbook used by Paul Volcker in the 1980’s. Unfortunately, progress is yet to be seen in trying to get either of their economies off the ground. For the first time, we have seen a Prime Minister resign in disgrace (Boris Johnson) a Prime Minister that lasted only 44 days in office (Liz Truss) and the first Prime Minister of color (Rishi Sunak) in the UK. The multitude of issues above have resulted in the catch-22 situation we see below, there is nowhere to hide.

This brings us to the conundrum of; where to hide when there is nowhere to hide? This year has been unfortunate yet fascinating. We have seen sectors of the market affected that nobody could have predicted, equities are commonly known to be the more volatile of the investment instruments while bonds are known to be lower yielding but “safer” investments, however, as seen above, this years’ market conditions have caused both the bond and equities market to hit the red together for the first time since 1969 and once before that in 1931. Gold is often a safe haven asset during volatile times, however during 2022, the price of gold has also fallen 9.81%. This illustrates that the unfortunate part of investing is that sometimes, we do not have a place to hide.

We as humans are tremendously impacted by fear and on a personal level it can lead to poor financial decisions being made. On a larger scale, fear can influence groups, communities, countries and even the world. It can consume us and make us prone to knee-jerk reactions, and therefore good financial advice will always be centered around education to offset the negative effects that fear has on our finances. The more educated we are as investors, the less we will worry about market noise and negative influences. Good portfolio management and generating returns are only a fraction of what makes a good financial advisor. Our main objective will always be educating clients and ensuring that the best financial advice and plan is implemented.

When all we hear is bad news it becomes difficult to try and find a silver lining, there isn’t much to be excited about when all we see is negative statement after negative statement, but we can find comfort in these times by looking in the rearview mirror, we have been here before and then some, and we came out the other side with positive portfolios and valuable lessons learnt as seen below from the Global Financial Crisis graph. We have been introduced to unprecedented economic and social situations, however, there are lessons from the past in both the global and the local financial arena that still ring true in these tough economic/market conditions.

Many inexperienced investors will opt to withdraw capital or switch investments (transfer to cash for lower volitivity) when the markets start underperforming and this is possibly the worst action to succumb to. By cashing out an investment when it has already fallen, you are deliberately losing money by selling units you own in the market for a discount on what you paid for them, due to fear of negative returns refer to the graph below:

The graph illustrates that during the Global Financial Crisis of 2008 we saw a fall in the S&P 500 of over 55% which would have led to massive negative effects on portfolios worldwide. However, in the graph above we see the difference between educated investors and fearful investors.

  • Investor A put $100 000 in the market and by 2007 it was worth nearly $240 000, due to the Global Financial Crisis in 2007, Investor A lost 55% of his/her investment. Succumbing to fear, Investor A decided to move the remaining capital of $108 000 to cash, today their market value is only $160 592 (4% Annualized ROI).
  • Investor B also had $100 000 in the market, and it also reached nearly $240 000, the Global financial Crisis struck in 2007 and Investor B decided to let the markets calm down, so he/she withdrew their $108 000 investment from the market and invested in cash for just 1 year before putting the funds back into the market, this left Investor B with a market value of $276 843 today (13% Annualized ROI).
  • Investor C has been coached well by their financial advisor, he/she understands that global markets can be volatile, but the key to long term investing is remaining invested and allowing time to do the hard work for you. The scenario is identical for Investor C, however, Investor C does not withdraw the funds but rather leaves the $100 000 capital invested in the markets throughout the crash and recovery and the market value today is $473 823 (28% Annualized ROI).

So, as we can see above, we learn a valuable lesson from the earlier proposed question of “Where do we hide when there is nowhere to hide” and the simple answer is that there is no need to hide. Your financial advisor would have considered the amount of risk you can tolerate and now that the volatility has ramped up it is important to realize that the returns will reflect in time even if your returns are negative in the present, but only if you remain invested. There is no need to “hide” or change your investment plan, rather, hide in plain site by staying in the market and reap the rewards that come later while others shy away from volatility now.