A market drop is always unsettling for investors, and the effects of the Ukraine crisis have stirred up a general feeling of uneasiness on top of this.
Like most of the world, we at FINPAS have been closely following the horrific events that have been unfolding in the Ukraine and Russia. Our prayers are with all Ukrainian citizens that have been roped into the clutches of war, and with the thousands who have lost their homes, loved ones and livelihoods.
What does this mean for the markets?
Since Russia is one of the largest producers of mineral and energy resources, and also taking into account the negative influence that the Covid-19 pandemic and its restrictions has had on the market, many investors are undoubtedly concerned about how their stocks are being affected. The market has been influenced worldwide, and subsequently some investors have pulled their money from the market all around the globe, despite suffering high losses. As independent advisors, Finpas works closely with numerous product providers and their specialists that understand the very real personal concerns that stem from humanitarian issues such as war, making it easier for us to provide some insight to our clients in this regard.
How has the market reacted to past negative influences?
One of the product providers that we deal with is Old Mutual, who have provided us with two graphs that show us one very important thing – the world has gone through this before… and come out of it!
Worldwide markets have experienced periods of decline due to changes caused by events such as elections, natural disasters and pandemics. However, the market has proven itself resilient, and ultimately increases after an unpredictable period.
As this graph shows, there have been many peaks and troughs between 1964 and now, but the market has always eventually recovered and climbed regardless, with an average increase of 11.56% annually over 58 years.
South Africa is in fact climbing out of a 22% drop in the market from the pandemic, and no immediate effects from the Russia-Ukraine conflict can be seen in the SA market as yet. There are examples of large dips in the market, but these are always followed by increases, and the extreme difference between the market value between 1964 and now proves the resilience of the market – these surges are part of the ride that you take when deciding to invest.
Looking at a shorter period, the South African equity market has had an average annual increase of 10.6% in the last 22 years.
We see again the climb of the market, interrupted by three separate negative periods each varying between 1 and 3 years long. If, for example, an investor pulled out in the downturn in 2002/2003, they would have suffered a loss of up to 33% on their investment. This loss could have been recovered and increased over the recovery period and market growth over the following 5 years and further.
What does all this tell us, and what words of wisdom do we have for our clients?
We acknowledge and understand the uncertainty and fear that stems from the difficult times we are living in. We also understand that sometimes it is not easy or possible to keep calm and level-headed while in such a state. This is why we have two practices that we use here at Finpas to keep our clients’ wealth as safe as possible – long-term investing and a well-diversified portfolio.
How to reduce risk
Investing in the markets is a risk, which is why we stress the importance of long-term investing, creating the opportunity to ride through peaks and troughs and come out stronger at the end of your target period. Ideally, your money will be withdrawn during a peak, and only when necessary.
What does diversification mean?
As an independent advisory practice, we are able to diversify our clients’ portfolios, spreading their funds between various investment managers and asset classes. Diversification is the key to reducing the effects of a downturn in a specific area. We also encourage our clients to spread their money geographically (onshore and offshore) according to your individual needs and objectives, trying to ensure that disruptions within your portfolio are minimised as much as possible when the market is experiencing a decline in one area or another.
"Keep Calm and Carry on"
Our main concern is keeping our clients focused on the long-term picture during this uncertain time, with the assurance that the market will pick up, and funds will increase again. Pulling out of an investment during a market dip will only result in a loss you almost certainly will not recover.
Keep in Touch
If you are interested in learning more, or diversifying your own portfolio to decrease risk, please contact us or comment below and we will get back to you.
The act of giving
If you are concerned about the humanitarian situation in the Ukraine, consider donating to https://giftofthegivers.org/online-payment/ with the reference “Ukraine”, to help aid the people in crisis, as well as helping repatriate South Africans from the country.
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