By Andrew Fussell of Fussell & Associates www.fussell.co.za
The COVID-19 Corona Virus outbreak has caused massive disruption globally, with deeply unsettling effects both on a personal and social level. The Panic is now widespread as more and more countries move into lockdown. Travel around the world is grinding to a halt, and governments are passing laws enabling them to take control of private healthcare infrastructure as they prepare to face the likelihood that public facilities will be overwhelmed in the weeks and months to come.
How does this impact markets?
Official shut down in economic activity became necessary to contain the spread of Covid-19, which has been enforced in some large economies. Global financial markets have seen a significant increase in volatility and related sell-offs as a result of uncertainty. The subsequent impact on global markets has seen global investors sell out of emerging market equities; and fleeing to more developed market equities, interest bearing investments and gold to reduce exposure to expected volatility in emerging market economies. Specifically, those who trade frequently with China as imports and exports to and from the country will be very limited in the current climate. This can be hard for countries such as South Africa as China is one of our major trading partners. Certain economies went through drastic measures to keep economic activity afloat which is also a contribution to volatility.
The depth and duration of the economic fallout will be highly dependent on the speed and comprehensiveness of health measures to contain the COVID-19 spread.
How does this impact my investments?
Overall, asset managers are cautiously optimistic and are on the lookout for any indiscriminate selling which could create purchasing opportunities. They also feel that the market can react rather drastically to news of this kind and tends to correct itself rather quickly. Portfolio managers devote their time to optimally manage a portfolio and deliver best risk adjusted returns for the end investor.
If you have committed to a long-term investment horizon, let patience rule in the aftermath of the coronavirus crash and maintain composure. Those who have been around for decades will know historically after a market crash there has always been a true and sustainable rebound in the market.
Monthly Contribution Investments:
If you are contributing monthly to your investment the best advice is to continue paying and if possible, preferably increase them. You are currently buying very cheap units because the markets have fallen. Every month you contribute you are buying more units for the same number of Rands. This is called rand cost averaging and it is a very powerful tool. Possibly as important and beneficial as compounding interest and time in the market. You will also not receive the tax efficiency should you be paying into a Retirement Product should you stop your contributions.
Lump Sum Investments:
If you have a once off lump sum investment you are seeing a paper loss which looks very real and very painful at the moment. You do not have the rand cost averaging ability to boost the recovery of this investment. Best advice again is to please hold on and don’t make any changes. If you sell out of your investment you realise the loss and make it real. The markets have recovered slightly in the last few weeks and the initial massive sell off, and we all believe, will continue to recover albeit with a great deal of volatility. Please do not sell out of your investments or switch into cash. Retirement portfolios are generally and specifically designed as a long-term investment and best advice is to not listen to the short-term noise. None of our Advisors are knee jerking and we urge you to sit tight.
Members close to Retirement:
The best advice is to remain in the current portfolio you are invested in. When the market has fallen this sharply it will rebound. Also please remember that once you have retired you will still be needing a very similar portfolio construction to what you are currently invested in. The current solution is that no client needs to sell out of their position should you retire. You can also defer your retirement should you not require the monthly income from the investment now and if this is at all possible it is highly recommended.
Members in Retirement:
There are current discussions around allowing a once off amendment to your income that you are drawing out of your Living Annuity, which will allow you to reduce your income to any percentage to a minimum of 0,5% per annum. If you can afford to reduce your income the best advice would be to do so. Drawing out of an investment in these volatile times has the opposite effect of Rand Cost Averaging because you are selling out monthly at the bottom of the market. There is talk of this only being a temporary change until 31 August 2020, but industry has asked for this to be extended until the end of the year. You can also increase the income, although this is most definitely not the best advice or option. Speak to your Financial Advisor if this will be required.
Conclusion
As tough as this time is for us all we urge you to not panic about your investments. The best possible and necessary care has been used in the construction process of the investment and the markets will bounce back. Please do not panic and stay invested. If you can increase the monthly investment contributions do so. If you can reduce your monthly income, we urge you to do it as soon as they open this up. We urge you to please contact your Financial Advisor should you have any other concerns or feel the need to have your questions answered.
