Investors have learnt some important investment lessons this year due to the market turmoil caused by the Covid-19 pandemic. Economic developments in the last few months reinforce the importance of diversification and the need to balance the risks of market volatility. In this way, investors stand a better chance of meeting both their short- and long-term financial goals.
Gontse Tsatsi, Head of Retail Distribution at Old Mutual Investment Group, says the key is to not place all your eggs in one basket. Rather, investors should focus on a multi-asset class solution that comprises shares, property, bonds and cash. “In this way, diversification is the one tool that you can count on,” he says.
“After the idea of ‘time in the market’ and extending one’s holding period for more than five years in order to reduce risks, diversification is the second most valuable tool to help you manage risk. This is because a diversified portfolio reduces the impact that a single, poorly performing asset has on your overall portfolio.”
Analysis by Old Mutual Investment Group on the performance of different asset classes over the past 90 years reveals some impressive results. The most significant is that although equities may have been the best performing asset class since 1930, cash was the best performer for 11 of those years and listed property for nine years. This is detailed in Old Mutual Investment Group’s Long-Term Perspectives 2020.
However, local equities topped the performance charts only 47% of the time over this period, followed by gold (18%), bonds (13%), cash (12%) and property (10%) — highlighting the importance of spreading one’s risk.
“By having a diversified portfolio, you don’t remove the volatility, but you can drastically reduce it. This was illustrated again with the Covid-19 market sell-off when equity markets fell by 28% between (05 March and 19 March). Balanced funds also fell between 8% and 23% depending on the exposure to equities (05 March to 24 March), says Tsatsi.
He adds that this is the reason for the government regulations that a standard pension fund allocation is 75% equities (whether in South Africa or abroad), 25% property (local or international) and/or 30% foreign investments (of which Africa makes up 5%).
“It may not be the best time for many investors to adjust their portfolios as some would be locking in losses caused by the Covid-19 pandemic. Going forward, however, this event should prompt investors to include greater diversification in their portfolios,” concludes Tsatsi.
“Now remains as good a time as any to reassess one’s portfolio to reduce over-exposure to high-growth, or low-risk, assets. A diversified portfolio needs to balance out various factors so that you meet your long-term goals without taking on undue risk.”
PERSONAL FINANCE