Carmen Mpelwane (CM), Senior Equity Analyst: Absa Asset Management
Cornette van Zyl (CvZ), Investment Analyst & Co-Manager of Absa Core Equity Fund: Absa Asset Management
Selling at the bottom of the market: is this a good idea? If not, why?
CvZ: No. It’s important to understand that consistency is key. If one sells at the bottom of the market (assuming you can accurately determine this point, which is highly unlikely and almost only possible in hindsight), you will most likely lock in your losses, destroy value and miss out on the subsequent rally. Remember, every single “bottom of the market” is followed by a rally, which is why it is called “the bottom”.
Will a recession pose an opportunity for investors? So in other words, are stocks and shares likely to be cheap(er) and therefore the best time to invest? If so, why?
CvZ: Generally, one should invest and save regardless of the market price levels or economic conditions. That said, historic trends show us that if one invests when the market is trading significantly below its historic valuation levels (based on price to earnings ratios, dividend yields and other valuation metrics), one has a strong probability of significant gains, as the market tends to mean revert. This might not be when the economy is actually in recession, but might be well before the actual event occurs, as the market generally anticipates the recession beforehand and analysts would generally forecast a recession before it actually happens. By the time the recession happens, the market might have already priced it in and the rally could start.
What stocks are typically going to do badly in a recession and why will they/could they bounce back when things get better? Can you give an example?
CvZ: My view that one shouldn’t stock pick, given that a sustainable financial solution consists rather, of a diversified portfolio across asset classes in various jurisdictions. Having said that however, I believe a company’s valuation is driven by its profit and cash flow growth. In tough economic times, companies that can produce growing or stable cash flows to their shareholders, fare better. These companies typically also have strong balance sheets and controlled debt levels that can pay decent dividends. In our portfolios we hold meaningful positions in diversified companies with strong cash generation like Standard Bank, Sanlam and Bidcorp, among others.
Should investors look at past performance of funds to gauge whether they should invest in them?
CM: Looking at past performance is not necessarily a good indicator for future performance. While doing this can provide you with an understanding of how well the fund manager performed during a specific time period, it cannot be wholly relied upon, for estimating future performance.
Is drip feeding cash into a fund a good/bad idea? If so, why?
CM: Investing through a fund should form part of any individual’s portfolio. This could take the form of a once-off lump sum or through monthly contributions. This decision however, depends on an individual’s availability of cash to invest. It would be prudent to ensure that investing occurs on a continuous basis especially where tax benefits can be derived from investing.
Should an investor consider investing in a fund that provides some kind of protection/guarantee if they’re nervous?
CM: This decision should be made by considering the following: the purpose of the investment, how the investment fits into the investor’s portfolio, the time horizon of the investment, the age of the investor and the investor’s current stage of life. For example, for someone closer to retirement, it would be best to invest in more conservative investments (or safer investments) that have a guarantee built into it. These types of investments are likely to have lower returns compared to a riskier investment.
In summary, what are your top tips for investing in tough economic times?
CvZ: My tips for investing are generally the same, whether in a strong economic environment or in tough economic times.
- Firstly, commit to investing. Making the conscious decision to invest and to save for a comfortable retirement and to move towards becoming financially independent and more so if you have dependents, is of utmost importance.
- Continue to invest through good and bad times. In investing, and to retiterate, consistency is key. Don’t give up on your monthly saving or investment just because you’re worried about the economy and the market, or because you become less worried about the future in the so called “good times”. In other words don’t try and time the market.
- Obtain professional advice. A professional financial advisor will consider your specific risk profile and your personal needs to help you choose a sustainable financial solution. I always use the analogy, if you need heart surgery, you would go and see a heart surgeon. Why do people treat their finances any different?
- Don’t try and stock pick. A sustainable financial solution consists of a portfolio of diversified assets across geographies. By selecting a concentrated portfolio consisting of a few stocks you end up taking on too much risk, not justifying the probable returns. In my view, you only hear about the few individuals that made a lot of money by stock picking. You don’t hear about the many that suffered significant financial losses by the same token.