Invest far and wide in tough times

Crazy politicians, global terrorism, corruption and slow economic growth are some of the issues troubling investors now. These are challenging times that can cause you to stay awake at night, however, they can also provide a terrific opportunity if you are willing to take calculated risks.

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Great investors get excited when everyone else is worried because fantastic investments can only be bought at a discounted price when most people are fearful.

Diversify to manage risk

When economics and politics cause financial instability, it is easy to look for comfort in safe and predictable investments. Most South Africans would consider bank accounts and fixed deposits to be safe harbours in tricky times. Investors in overseas markets would have a similar view of American investments—a safe place when the world is troubled. Unfortunately, safe investments can prove to be very destructive to your long-term wealth creation.

Investments in bank accounts or fixed deposits might seem like a clever idea because your money cannot go down and you are certain of earning interest every day. Unfortunately, you are also certain of not achieving enough interest on your money to beat inflation over extended periods of time. This is especially true if you pay income tax on your interest. In this instance, safety is merely a guarantee that your capital will erode in buying power over time.

The USA might seem like a great place to invest as the economy is doing well, unemployment is shrinking and many of their large companies are thriving. However, the US also has a President who has made many promises that are going to be difficult to keep and a lot of money has been bet on him succeeding, especially with his proposed tax reform. The US stock market is at elevated levels (at the time of writing) and investors might be very disappointed with the growth of US shares in the years ahead.

The best way to manage your risks in uncertain times is to spread your investments across a variety of countries, industries and asset types. Proper diversification of your investments will often limit losses when markets fall but it is not a magic pill that will prevent you from losing money. A properly diversified portfolio of investments will generate good growth in rising markets and limit your losses when markets are falling.

Where are the opportunities?

South African investors might be wary of allocating money out of SA and into global emerging markets, however, these markets constitute more than 40% of global GDP and include countries like Russia, Brazil, China, South Korea, Chile, India and Taiwan. According to the Financial Times, Chile has a bigger economy, a bigger population, less debt and lower unemployment than Portugal but is classed as an emerging market while Portugal is developed. A notable example of the growth offered by emerging economies is India, whose economy is growing by more than 7% per year and is forecast to contribute 17% of the world’s economy within 12 to 24 months. One must question if an investment in emerging markets is still as risky as it was 20 years ago.

The South African stock market has been in the doldrums for the past three years, as the index level has been relatively stagnant over that time. However, valuations for most South African businesses have improved and this means the potential for capital growth is increasing.

It is worth remembering that most of the large companies that are listed on the stock market are not really South African firms anymore. For instance, Naspers earns less than 30% from South Africa with the rest earned from countries like China and Russia. Similarly, British American Tobacco operates in more than 200 countries and is only listed in South Africa for historical reasons.

Spread your investments over asset types

Many South Africans have an absolute fixation with residential property. When they consider investing overseas, the first thing they look for is residential property. History shows that the housing market generally provides pedestrian growth over time. There are some remarkable stories of investors who have made significant returns from property but their success is offset by many more stories of those who lost their fortunes in this market. For instance, the Japanese property market imploded in 1992 and caused a decade of lost growth for investors.

It is worth considering whether the London property market is primed for a correction if Brexit goes badly. There is little point in taking your assets out of SA because you want diversification only to invest all your money in one property in one city that might be overpriced. Rather spread your investments across different types of assets e.g. shares, bonds, property and cash. In addition, aim to invest in a range of countries with differing demographics and industries.

Be patient

The best investment decisions are made when your time horizons are long. Try to invest for periods of seven years or longer.

You have no ability to predict markets, control events or even to anticipate how elections will turn out so make sure your investments are not going to be massively affected by short-term events. 

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