Most people are familiar with the following prayer: “God, grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to tell the difference”.
There are lots of lessons we can take away from the last three years. 2020 taught us that things can happen on a global scale and impact our lives and livelihoods materially, without our having any control over them whatsoever. 2021 showed us that we humans have the capacity to turn a calamity that threatened to drag us down a deep black hole, into an opportunity for innovation, adaptation and positivity to lift us up on a cloud of exuberance. And 2022 showed us that civilization is built on an intricate system which, if disturbed, can have a dramatic effect on how we live our lives.
One of the most important lessons we have learned here at JWR, is that we should help our clients neutralise investment volatility – over which we have no control – by assisting them in executing their own investment plan to the letter. As individuals, or even a small collective, we have no control over the price of a share. There are market forces far greater than us that determine market movements. As investors, we have to focus on the quality of a business and not purely on the price of its share, because while the price of the share can be manipulated by a single transaction, the quality of the business is something far more permanent.
As investors, we have to understand that there is a difference between the price of (the shares of) a company, and the value of a company. We have to also acknowledge that there will be times when the share price of a company is not in line with its value. In times like these, you need to have the courage to make changes to your portfolio in order to bring it in line with your original investment plan. At JWR we follow an investment approach called Strategic Asset Allocation where we match your expected expenses to the asset classes you invest in. We recommend that you keep enough cash to cover expenses for three to four years and invest all the money you will only require after seven years in equities. The rest then goes to balanced funds.
As an example, we can look at the past three years and apply this approach to the volatility in equity markets. At the end of 2020 equity markets were all positive for the year and you were able to top up the cash you had drawn during the year by selling some of your equity or balanced funds. At the end of 2021 equity markets were up substantially (JSE +24% and S&P500 +28%). This skewed your portfolio to be overweight in equities and you were able to top up your balanced and cash pools. Then came 2022 and equities lost a lot of value, especially overseas (JSE -1% S&P500 -19%). This should not be a problem for you, because you still have enough cash and balanced funds to wait for equities to bounce back.
We are inclined to become emotional about things we cannot change. These emotions often result in bad decisions, whether personal or in our investments. It is essential for us to distinguish between those things we can change – and those we cannot. In the case of investments, the wise choice will always be to implement and follow your Strategic Asset Allocation framework.
At least 2023 has started on a very positive note and we can only hope that this will continue throughout the year.