Downgrades: keep a cool head


The effect of recent political events on South African markets may have you thinking that your best bet is to move your investments out of the market and into cash.

Leigh Kohler, the head of research at Glacier by Sanlam, says at times like these, investment platforms and houses are inundated with investors asking about switching their investments into cash.

Cash investments are investments on short-term, variable-rate deposit with reputable banks and are readily available for use. Cash is free of most investment risk, except for the low risk of the bank failing.

Kohler says you need to remember that, while a cash investment may seem like a safe one, after tax it diminishes your purchasing power over time, as the returns are often not inflation-beating.

South African cash investments outperformed local equities and bonds only once in the 15 years between 2001 and 2016, Kohler says.

Over this period, you would have received an average return of 7.96 percent if you were invested only in local cash investments, 10.12 percent if you were invested only in local bonds, and 17.12 percent if you were invested only in South African equities.

If you try to move your investments into cash and back into the market when things are calm, you are essentially making two very difficult market-timing decisions: when to move out of the market and when to move back in, Kohler says.

Research shows the risks of getting that timing wrong; missing just a few of the best days on the market can have a huge effect on your portfolio.

Shawn Phillips, a research analyst at Glacier by Sanlam, says that, generally speaking, cash performs relatively well in periods of rising interest rates, because investments are short term, and during periods of high stock-market turbulence, due to its defensive nature and low correlation with other asset classes.

While no one can be certain what markets will do going forward, or what returns will be like for various asset classes, what you can be certain of is further volatility. The local share market has experienced heightened volatility since 2015, when former finance minister Nhlanhla Nene was fired.

Being invested over time in equities and listed property, and riding through the volatility, are how you earn inflation-beating returns, Kohler says.

To earn higher returns from local equities and bonds, you have to take on extra risk and this means staying invested and believing in your long-term investment strategy, he says.

At times like this people are emotional, but making decisions about your investments on emotion is an investment no-no, he says. Ideally, however, you need to invest in a combination of asset classes in line with your investment needs, investment time horizon and tolerance for investment risk.

Kohler suggests you make use of a professional investment manager who can make informed calls on the prospects for the different asset classes by investing in a suitable multi-asset fund.

And he suggests you diversify your exposure and ensure you have sufficient exposure to offshore assets.