It’s been more than a year since the pandemic-induced stock market meltdown, and since the Bailiwick entered its first lockdown. Whilst in the island our lives have mostly returned to normal, we reflect on the challenges investors faced, and how they emerged from the depths of the COVID crisis.
Peregrine Wealth’s Managing Director, Hennie Esterhuizen, shares insights on the importance of preparing for unforeseen events.
From grappling with the trials of an unprecedented lockdown to pivoting rapidly to working from home, over the past two years it was essential to adapt – and fast. But the key factor in both investing and wealth management is that you will always face the unexpected. Dealing with the unanticipated is, quite simply, what we do.
With the frequency of natural disasters forecast to increase, huge demographic shifts underway and a global power shift taking place, the future is, as ever, uncertain. History rarely repeats in a precise way, however we know that there will be COVID-sized shocks to the market again.
With this in mind, here are four lessons that Covid-19 has re-emphasised for investors and wealth managers:
EVERYONE HAS A PLAN … UNTIL THEY GET PUNCHED IN THE MOUTH – MIKE TYSON
The first lesson from our lockdown experience is that everyone must have a plan – both from an asset management and a financial management perspective. You need a plan that will accommodate the shocks that you will experience along the way.
Often, people’s initial reaction to anything new and different is to throw the rulebook away. But if that rulebook accommodates the ups and downs, if it has built them in, then there is no reason to discard it. It will be easier for you to ride out the storms and stick with that plan.
A GOOD PLAN GETS YOU INTO THE RACE, BUT STICKING WITH IT PROPELS YOU INTO THE WINNER’S CIRCLE – LEE COLAN
One of the most pernicious behavioural biases to which investors are subject is the ‘disposition effect’, which forms part of a wider concept known as ‘loss aversion’.
Human beings are seemingly hardwired to have a disproportionate emotional response to losses when compared to that experienced from equivalent gains. Disposition effect manifests itself in a tendency to hold onto a losing investment for fear of crystallising a loss, even when the original investment case behind holding a position has been significantly diminished. Taking profits on a successful position often seems the more palatable option, even when there is plenty of further upside remaining. This type of behavior frequently leads to poor investment outcomes.
From private investors to asset managers, a defined plan and a more systematic approach helps to avoid the more deleterious effects of human behaviour on investment returns.
NEVER MISTAKE MOTIONLESSNESS FOR INACTIVITY. CROCODILES GET MOST OF THEIR MEALS THAT WAY – HETTY LANGE, NCIS
In times of market turmoil, investors are bombarded with a never-ending barrage of newsflow, statistics, data and real-time information. The natural response to all of this noise is to do something – anything – to retain an illusion of control over a situation that is, ultimately, out of the control of any one individual or group of individuals. Again, action for the sake of action is rarely conducive to the achievement of investment objectives. Doing nothing, as uncomfortable as it may seem at the time, is often the best option.
Accepting at the outset that investment markets can gyrate, often quite violently, and building this assumption into your plan means that you are fully prepared for the unexpected and able to control the impulse for unnecessary action.
IF YOU WANT TO SEE THE SUNSHINE, YOU HAVE TO WEATHER THE STORM – FRANK LANE
There are many ways to weatherproof and protect a portfolio for uncertain and unexpected times. These include diversification amongst asset classes, investment styles or portfolio constituents, but the one that I want to emphasise, and which is probably the easiest to achieve, is simply matching your liabilities to your liquidity.
You don’t ever want to be a forced seller who is pushed to lock in short-term losses. By matching your liquidity to your liabilities, you can ensure that you are a planned seller in the market.
At Peregrine Wealth, we follow these four guidelines as investors ourselves, and we help our clients to incorporate the same four steps when establishing and following their financial plans. We know that life will always throw us curveballs – we just don’t know when. As long as you are well prepared, you will be able to pull through financially.
Get in touch to find out more.