With the global equity index trading near all-time highs (and without having had a crash for some time), we are hearing more and more concerns about market risk when investing in the current environment.
Volatility seems to be on the rise, and there are certainly risks such as those relating to Chinese regulatory concerns, supply chain disruption, the ability of economies to reopen effectively after pandemic shutdowns, and the decision of the US to withdraw liquidity.
5 ways we intentionally manage the market risk of investing
- When putting your investment plan together, we ensure that the investment timeframe is appropriate to your specific circumstances, allowing you to withstand market corrections. Only when you sell the investment, do you really lock in losses.
- We use asset managers who have a deep understanding of the companies they own, and thus do not just buy an overall potentially expensive market. Managers will naturally look to invest in companies that are able to cope with (and thrive in) a global environment that is ever changing and able to manage the risks currently being faced.
- We include active fund managers who spend time understanding valuations of stocks compared to their prices. We believe that, based on the distortions that we are seeing in the market at present (driven by the focus on growth companies such as the big tech stocks), active managers may be in a position to outperform, or at least to better manage risk within portfolios, than index solutions in the current environment.
- We include ‘balanced funds’ in your investment planning. This allows managers to spread the portfolio between the different asset classes (shares, bonds, property and cash) and invest where they see opportunity (this includes allocations to developed markets vs emerging markets). In this way, we access their asset allocation views and benefit from their efficient rebalancing within each underlying fund.
- We have always focussed on putting portfolios together that will deliver the required returns for our clients in a number of future potential scenarios, without betting the house on any one scenario, and we understand the investment philosophies of the managers that we make use of in this regard.
Markets go up, markets go down
But history has taught us, among other things, that investors can’t time the market effectively. The old saying, “it’s time in the market, not timing the market that counts” is as relevant as ever in these Covid-19-pandemic times.
At Netto Invest, our approach is to spend time understanding your true investment timeframes and objectives, to make use of a mixture of good asset managers, to diversify appropriately, and to focus on the long term. The short-term volatility dissipates over time.
By Cameron McCallum, CFP® CA(SA)
