Investors are facing tough times during the COVID-19 pandemic witnessing the daily negative impact on their accumulated wealth. However, Alexander Forbes Investments reminds investors that they have weathered periods of market volatility before.
“We encourage investors to focus on performance over the long term,” says Gyongyi King, Chief Investment Officer at Alexander Forbes Investments. The investment house reminds clients of the importance of a risk-led approach during times of heightened volatility. It is hard to come out unscathed when there is a severe shock across virtually all financial markets but spreading risk effectively can help limit the extent of losses during these times. Diversification helps limit losses so that investments can grow off a higher base when markets recover, increasing the likelihood of meeting investment goals in the long term.
“Purposeful diversification is a risk control measure to reduce drawdowns and increase predictability of outcomes. It comprises three steps:
1. Asset allocations
Identifying how much to invest in each available asset class across traditional and alternative assets, locally and globally, in line with specific investment objectives
2. Strategy selection
Determining which styles of money management, or factors, within each asset class work together optimally in the context of a portfolio’s objectives
3. Asset manager selection
Researching the asset manager universe to find those best placed to implement the desired strategies
King suggests that South African investors follow the following process:
1. Review the actual allocation to enhance the likelihood of reaching investment goals.
2. Maximise exposure offshore. Rand hedge exposure within portfolios remains negative for South African company earnings due to continued weakness in domestic economy.
3. Ensure purposeful diversification across asset classes, strategies and asset managers as volatility continues to persist.
4. Increase exposure to hedge funds and alternatives, as low returns are expected to persist across traditional asset classes.
5. Stick to long-term strategies despite short-term market volatility.
6. Be patient – markets are cyclical.
7. Focus on your investment goal – success is not measured by beating benchmarks.
“Investing in markets always comes with some risk, geopolitical tensions, faltering global growth, healthcare emergencies, and the list goes on. During these volatile times, it is important to spread your investment risk to manage single-event risks and remain committed to your long-term investment strategy,” says King.