The impressive silver steam locomotive released clouds of steam as it smoothly pulled its elegant coaches away from Cape Town station, setting off northeast toward Pretoria. Dark clouds, driven by the westerly winds, hovered over the train tracks while passengers delighted in canapés and sipped their welcome cocktails. The fog significantly impaired visibility, rendering the surrounding scenery almost indistinct. As they nestled into their comfortable armchairs and peered out the carriage windows, the guests found themselves unclear about their current location or their next destination.
Despite this uncertainty, they were well aware from the tour brochure that their journey would be a prolonged one, filled with numerous climbs and descents through the mountains, some monotonous stretches across the desert, and a wealth of lively and beautiful vistas. If they remained on the train for its extensive course, they were confident they would arrive at their destination, situated 1,400m higher than their starting point, feeling well-nourished, relaxed, and prepared for the next stage of their adventure.
Investing in the markets mirrors that long-distance train ride; your long-term wealth-building journey can easily become off-track if your investment strategy is not kept in alignment. Throughout a lifetime of investing and planning for retirement, challenges will inevitably emerge that cloud the investment landscape.
As investors, we encounter new uncertainties daily and monthly that prompt us to consider halting at the next station.
We scrutinize our investment strategy, asset allocation, and stock selections. At this point, looking out the train window, a multitude of clouds complicates our decision-making about investments.
While clear skies are inviting, clouds are crucial for rain …
Volatility and share prices
The global political landscape is volatile as deglobalization accelerates, trade tariffs take precedence over free trade, Russia continues its conflict with Ukraine, and the ceasefire in the Middle East remains precarious. Following numerous elections globally last year, power shifts have become a norm. In the US, Republicans have surpassed Democrats, while Labour has replaced Conservatives in the UK, and multi-party governments have emerged as standard.
Donald Trump’s potential return to office is already impacting global economies and markets significantly. His 75-plus executive orders, threats of tariffs, and leadership decisions have intensified the stormy clouds over the investment landscape. Would you contemplate investing in real estate in Greenland if it risks transforming into Red, White, and Blueland?
We will always be investing within an environment filled with uncertainties. No one has a dependable crystal ball, so we must navigate these uncertainties, recognizing and mitigating prevailing risks when possible. It is this uncertainty that fuels market dynamics, as contrasting opinions among investors lead to some buying while others sell.
Often, uncertainty can escalate to a point where it prompts market volatility—the phase when prices fluctuate dramatically, sometimes without any rational explanation. Exercising caution while investing in the equity market is paramount due to this potential price volatility. Though this risk is inherent, it is also what attracts investors.
Price movements are necessary if you’re anticipating growth. In the short term, investors wishing to liquidate their positions might find themselves confronting adverse price movements; however, over a longer horizon, the risk of capital losses diminishes.
Over extended periods, stock prices may benefit from inflation, increasing company earnings, the compounding effects of reinvested profits, alongside gains from efficiencies, productivity, or innovation. Yet, prolonged investment horizons do not guarantee success, and a simplistic buy-and-hold strategy with closed eyes is not advisable. Vigilance is essential, even with a carefully diversified portfolio of top-tier stocks.
After severe storms, rainbows may emerge …
Market crashes
Throughout the years, numerous so-called Black Swan events have disrupted the investment landscape, leading to extraordinary levels of market uncertainty and volatility. Significant occurrences like 9/11, the 2008 Global Financial Crisis, and the Covid-19 pandemic provide recent examples.
When uncertainties become overwhelming and investment risks escalate, the path of least resistance for investors and markets often trends downward. Investors may rush to exit at any cost, and the ensuing wave of negativity and panic selling drives the market lower. This is when frightened investors may lock in actual capital losses while missing the chance for subsequent recoveries.
The bursting of the Dotcom bubble in 2000 is a prime example of such a market collapse. Technology stocks soared on the promises of the internet, resulting in inflated valuations. The Nasdaq Composite Index surged from 3,000 points in November 1999 to over 5,000 points in just five months. Eventually, disillusionment with the unsatisfactory profits of internet companies set in, causing the index to plummet below 2,600 by late 2000 and continue its decline to under 1,200 points by October 2002 (down 78% from peak to trough).
The JSE also felt the impact, losing 28% within four months in 2000 before rebounding by 81% to reach a record high in May 2002. Yet, it subsequently surrendered 37% over the next year before climbing an impressive 327% over the subsequent five years.
Attempting to predict the market during any of those shorter timeframes would have proven futile, while maintaining a steady course over the long haul would have yielded notable rewards. Market crashes, though painful to endure, are merely blips on a long-term graph. Savvy investors often perceive significant market downturns as prime opportunities to acquire quality companies at attractive prices.
Principles for investment
Building and expanding wealth within the equity markets is a long-term endeavor. A straightforward rule may be to ‘buy the good stocks and hold onto them,’ but this perspective does not encompass the entirety.
‘Buy the good stocks’ emphasizes the importance of conducting thorough research and investing in reputable companies with a strong history of revenue and earnings growth while reinvesting in their advancement. This is where share prices appreciate over time and enhance your investment portfolio’s value.
‘Keep it’ suggests exercising patience, having trust in your analysis, and holding onto your chosen shares for the long haul.
What this simple rule overlooks is the necessity for continuous monitoring. As technology advances and competition intensifies, some companies that once held a significant competitive edge may find that advantage eroded.
Great companies do not always maintain their greatness indefinitely, and even a long-term growth portfolio may require adjustments from time to time. Remember Kodak, Polaroid, Blackberry, Nokia, and Blockbuster? These once-mighty companies are now mere case studies in business education. Perhaps a more suitable mantra would be ‘buy the good stocks, keep an eye on them, and be vigilant for new opportunities.’
For those who relish the thrill of the markets and struggle with patience, it may be prudent to maintain a core long-term investment portfolio (approximately 90%) while dedicating a small portion (around 10%) to riskier, shorter-term assets. This portion can include less-researched small-cap stocks, promising yet unprofitable startups, or favored cryptocurrencies. Losses in this ‘fun’ segment wouldn’t affect your long-term growth portfolio, allowing you to stay on track for future years.
You won’t fail if you stay on the rails
As you embark on your investment journey, look beyond the inevitable clouds. Savor the rhythmic clickety-clack of your dividends, ensuring they are reinvested into your portfolio rather than wasted on fleeting pleasures. And if Trump exclaims ‘Boo!’ and disrupts the markets, consider it an opportunity. Look for chances to acquire quality stocks at favorable prices or to further diversify and refine your long-term investment portfolio. Enjoy the journey—although bumpy, staying on track is essential.
Brought to you by Sasfin Wealth.
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