Many private investors have made basic – and expensive – investment errors during market downturns.
Here’s what they’re doing wrong, and how you can avoid the same mistake.
As an example, the COVID-19 pandemic played havoc with world markets. Economies wobbled, share prices plummeted, and fortunes were lost (or, in rare cases, made). In this panic-inducing environment, many investors made a basic – yet understandable – mistake. As they watched the value of their investment portfolios lose value, they panicked and sold.
Terrified that they would lose it all, they disinvested and (as they saw it) got out before the bad times turned even worse. In that moment, their portfolio’s unrealised losses became actual losses. Because, as Carrick Wealth Group Commercial Director Anthony Palmer points out, as an investor as soon as you sell, you are out of the race and have crystallised a permanent loss.
Palmer remembers having lived through similar market panics. “I was in New York [in 2001] when the Twin Towers came down,” he says. “I saw the markets crash. I was there for the global financial crisis [in 2008]. The one thing I learned from those experiences is not to panic. Markets do recover. Just sit tight. It’s going to be okay.”
What Palmer is getting at is the idea of “time in the market”. Investment is a long-term game. If you try to time the market by buying when assets are cheap and selling when assets are expensive, you’ll inevitably get your fingers burned. More often than not, the opposite happens: you end up buying at the wrong time or – worse still – selling at the wrong time, locking in your losses.
Looking back on the market shifts of 2020, Palmer said: “The message that we constantly pushed with the team was to communicate. Yes, markets had dropped by 25% and portfolios were down by 25%, but it was not the time to put our heads in the sand. Clients needed to be told to keep a calm head. Many clients trust advisors to make decisions or give them sufficient information to make a decision, however, when a client sees their R100 000 investment is down to R75 000, panic sets in and 50% of the time clients want to cut their losses. That’s the worst thing that anybody can possibly do. So we instituted monthly servicing visits and conversations (instead of quarterly). We really just tried to be there and reassure clients that it was going to get better. And it did. Fortunately, we didn’t have one client liquidate their portfolio during the course of last year.”
By increasing the frequency of their servicing calls, Carrick’s financial advisors helped keep their clients aware of how their portfolios were performing, while also offering the ‘voice of reason’ that only a qualified, trusted advisor can provide.
And while most private investors are happy with an annual check-in, Palmer believes that’s not often enough – at least, not when it comes to managing an investment portfolio. “Check-ins need to be daily,” he says. “That’s why we prefer using a Discretionary Fund Manager (DFM) who is constantly monitoring the portfolio and proactively making tactical tilts. However, with respect to a client’s personal circumstances, risk profile, changes in work, etc, I think an annual review is the bare minimum. Ideally, it should be quarterly for a thorough catch-up.”
Working with a financial advisor will enable you to get new, innovative investment ideas while having someone to bounce your own ideas off. “A good advisor understands the investment strategy clearly, as well as the risk associated with the strategy,” says Palmer. “They understand why there are building blocks in place and what each block and investment’s role is in your overall portfolio.”
Panicking during a crisis is a bad enough mistake. Panicking alone and acting without the guidance of an expert takes a bad mistake and makes it even worse.