Rebuilding wealth after a crisis

Anet Ahern, CEO PSG Asset Management

For many of us, 2020 has certainly left a mark on our finances.

Maybe you have had to access your savings to make ends meet, or perhaps you’ve simply realised how precarious your financial position really is. For whatever reason, many of us are asking the same questions: How can we grow our savings and build wealth for the long term? How do we best position our portfolio to deliver on the most basic requirement, which is to outpace inflation, despite the severe economic upheaval?

The thing to remember first is not to panic and make rash, emotional decisions. Panic paves the way for mistakes, and making mistakes in this environment could be more devastating to your long-term wealth prospects than any losses incurred so far. Here are some mistakes that are best avoided, if your focus is on rebuilding your long-term wealth.

Thinking the future will look the same as the past

When times are tough, we think things will continue this way indefinitely, and people tend to make decisions based on fear. Being aware of this tendency and recognising it in yourself if it arises, may help to keep you focused on your long-term plan. One thing history tells us about the markets is that the good times don’t last forever – but neither do the bad ones. A key aspect we often overlook is that during tough times, good companies respond by becoming leaner and more efficient.

Once demand returns to the market, the impact is really felt in the earnings recovery. Investing is a long-term game, and evaluating returns from equity over a one- to three-year period, or even over five years, can give a skewed perspective. This is especially the case since we have seen such an abnormal return environment over the past few years, where fixed income investments have outperformed equities. Assessing your investment returns over periods of longer than five years will give a more balanced view, as will focusing on tried and tested investment principles.

Looking for silver bullets

Investors have flocked to fixed income and money market investments recently, not only because these have avoided much of the recent short-term volatility, but also because they have tended to outperform equities over the past few years, uncharacteristically even over longer performance periods. Fixed income investments are by no means a silver bullet however, and investors need to be cognisant of the risks these investments pose over the long term as they cannot deliver the growth you need to keep pace with inflation. Over the long term, having a portion in equities is still the best way to build wealth.

And for those thinking “I’ll stick to money market for now, and get back into equities later”, how are you going to time this move, and have you factored in any tax implications? Research shows that the average investor’s experience tends to be a lot worse than the market over all periods, precisely because it is impossible to time the market and we are often led astray be our emotions.

Not keeping emotions in check

Emotions drive financial behaviour, and our emotions are often based on the extent to which our expectations are met or exceeded. Nobody expected a global pandemic this year, and very few investors will feel that their expectations were met.

The best thing any of us can do now is to control the ‘controllables’. Unfortunately, market performance is not one of them. But your behaviour is. Remembering some of the fundamental rules of investing remains the best way to safeguard your savings and rebuild what you may have lost. These include:

• Stick to your plan, but remember that planning is a process and can change along the way. If you haven’t checked in with your financial adviser this year, set aside some time with them to review and look ahead.
• Diversify. This way there should always be something in your plan that is working out.
• Be conscious of the emotional obstacles that threaten to derail your efforts and always take a long-term view.