With the current volatility of the financial markets, many of our clients are approaching us with questions about their investments and their planning. As Private Wealth Specialists we are always happy to engage in these kinds of conversations because we want you to feel confident in our investment process and in your plans for the future.
In this regard, we thought it would be useful to share some of the more pertinent and often complex questions that we’ve been enthralled to discuss
I’m invested for the long term – but how long is that really?
The term of your investment needs clarity and may require an ongoing conversation with your adviser. The time horizon could be connected to a specific outcome or plan such as your goal of living overseas, buying a property or simply, making sure you enjoy maximum income longevity.
With the above in mind, we at Kanan, are very much committed to the pursuit of your end goal and are not distracted by short term, unsubstantial market movement.
On a deeper level, the journey of building and preserving wealth may actually never end. In other words, your money may take many forms over its lifetime as it morphs between assets and geographies. For this reason, we hope that the rational investor only ends the term of their investment in a particular asset once they discover a better alternative.
In other words, the long term is as long as it takes to realise the optimal return on a particular asset.
Why is it not possible to guarantee returns on investment products?
It is very possible and these solutions are widely available. However, we at Kanan Wealth prefer to only offer guaranteed solutions near the top of an interest rate cycle. This is because our clients can then lock in a better rate for longer. At present, guaranteed solutions are playing into investor fears and offering relatively low guarantees.
Finally, it is important to note that guaranteed solutions often demand a long, fixed time period and we believe that the investor is, therefore, often at risk of forsaking many better opportunities over the same time frame.
How does benchmarking work then?
There are various types of benchmarks but they can broadly be broken down into market centric versus client centric. Market centric, for example, would compare The Kanan Wealth CPI + 5% model to Allan Gray Balanced. While beating Allan Gray serves as a nice sales aid, it isn’t really helpful for financial planning. In other words, given that the case for wealth management centres around the perils of inflation, we feel that inflation-linked benchmarks create tangible and relevant investment solutions.
Is investing in a high-risk portfolio really risky?
High risk generally implies 100% exposure to equities which carry the most volatility. If your adviser hasn’t prepared you for the substantial ups and downs of the equity market, then you run the risk of panicking and incurring a self-induced loss. This is because a loss is only a loss when you realise your investment via a premature sale or withdrawal.
I’ve been told the market has been volatile recently, and my returns have reflected this. Is there a strategy behind my portfolio or are you just as surprised as I am when I realise low returns?
Very simply, no, we’re not surprised! The market has five core sectors: financial, industrial, resources, gold and property. Of late, we at Kanan Wealth have been concerned by industrial and property stock valuations and have seen opportunities in the gold and resources spaces. For this reason, many of our clients’ returns have not been as flat as the majority of South African clients, given that many asset managers have been hugging the index and have been more overweight in those problematic sectors.
There is a sense that the market is running out of steam, and there is a general global economic slowdown, but on the positive side, there seems to be a revival in emerging markets. We are constantly tracking factors in these markets and speaking to our advisors (Fundhouse) to make the most informed financial decisions for you.
Why is it important for me to invest in assets with volatility and risk?
The number-one rule of investing is that you can expect a higher return from assets with a higher risk element. We see high returns as important, given the various risks in the world today. Ie, your money needs to work hard so that it stands the test of time and lifestyle inflation, bearing in mind factors such as unemployment or you very own longevity within retirement
The slightly more complicated answer is that an investment in a share or equity means exposure to a profit focussed entity. This profit focussed entity must deliver a return to shareholders who must be compensated for the risk they took when handing over money to the business and the business must also make a profit ahead of inflation in order to be sustainable. In other words, equities are forward looking investment vehicles.
Volatility exists because there is a daily debate raging between buyers and sellers in the market and at the moment, there is a lot more volatility because there’s actually a lack of trend in one direction.
How can I protect myself against this kind of volatility?
Diversification and a long-term/ goal oriented mindset. The point isn’t to protect against volatility; it’s to ride it out. If you are very concerned about market volatility at the start of an investment cycle, instead of investing R1 million straight away, you can invest R100 000 a month for ten months, to get a smoother average experience through rand cost averaging.
Additionally, it should be helpful to note that your portfolio has been built with a set of unit trusts/ assets each intended to exploit a certain opportunity or withstand a particular storm.
Can you show me any performance data to show that long-term investments really do deliver?
Annualised Returns |
||||||
Fund |
1 Month |
3 Month |
1 Year |
3 Year |
5 Year |
10 Year |
Allan Gray Equity |
0,42% |
-0,12% |
16% |
13,50% |
16,60% |
13,60% |
Investec Value |
-3,50% |
14% |
71% |
19.65% |
14,40% |
12,30% |
When considering the above, note the 10 year returns include the 2008 market crash and that Investec Value was substantially lagging its peers up until March 2016.
What if I can’t stomach the risk?
Call your Kanan Wealth adviser. We are happy to meet as often as you need. But please understand that your best medicine against making irrational decisions when faced with volatility is to go back and review your time horizon and goals for your investment.
Are you confident in your investment process? How can I trust you?
Yes, of course. Our relationship with FundHouse ensures that we combine the asset managers in a sensible way to reduce volatility due to effective diversification. We continually review performance against our set benchmarks. And we work with our clients to identify their goals, report to you regularly, meet whenever you want and adopt an approach of patience and trying hard to understand your needs.
We are also not afraid to challenge you on your thinking when we think it’s not going to get you the best return.
Please feel free to contact us with any other questions your might have, or for clarity on anything we’ve discussed.
Yours, in financial freedom,
Stuart Kantor
CEO