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What COVID-19 Has Taught Us About Wealth Management

It’s been over a year since the pandemic-induced stock market meltdown and since South Africa entered hard lockdown, and it is time to look back and examine what this period has taught us as an industry.

The wealth management industry has had to face down a year unlike any we have ever seen before. From grappling with the trials of an unprecedented lockdown to pivoting rapidly to working from home, it was essential to adapt – and fast. But the key factor in both investing and wealth management is that you will always face the unexpected. Dealing with the unanticipated is, quite simply, what we do.

One of the most important characteristics for success in this industry is understanding and accepting the seasonality or the cyclical nature of markets. And this will never change. Investors will increasingly need to build seasonality into their mindsets. We should always expect such events or corrections but, significantly, we should expect that they will become even more commonplace. This is not humanity’s or the world market’s first rodeo and, just as sure as summer will follow spring and winter follows autumn, so will this pass.

What we do need to consider, though, is that the frequency of natural disasters and unexpected events will rise, and that we need to design and hardcode portfolios to withstand shocks of this nature.

With this in mind, here are four lessons that COVID-19 has re-emphasised for investors and wealth managers:

1.     Everyone has a plan … until they get punched in the mouth – Mike Tyson

The first lesson from our lockdown experience is that everyone must have a plan – both from an asset management and a financial management perspective. You need a plan that will accommodate the shocks that you are bound to experience along the way.

Often, people’s first gut reaction to anything new and different is to throw the rulebook away. But if that rulebook accommodates the ups and downs, if it has built them in, then there is no reason to discard it. It will be easier for you to ride out the storms and stick with that plan.

2.     A good plan gets you into the race, but sticking with it propels you into the winner’s circle – Lee Colan

One of the strongest behavioural finance traits is known as the “disposition effect” or “loss aversion” – in other words not wanting to lose. For investors, this typically manifests as a tendency to immediately sell those assets or shares that are down and to hold onto those that are up, keeping the winners and selling the losers.

However, while share prices may constantly fluctuate, the actual intrinsic value of the shares is very unlikely to change overnight. If they were viable, strong, functioning companies before the price drop, as long as the price movement has nothing to do with the underlying company, they will remain robust entities after the market downgrade. This is particularly true when the move comes from a systemic change and there is no reason why what was a good share yesterday is still not a good share today. In fact, at the lower price, it might be an even more attractive investment.

The point is simply that asset managers need to stick to the fundamental analysis as much as possible at all times, while clients need to stick to their financial plans too.

3.     Never mistake motionlessness for inactivity. Crocodiles get most of their meals that way. – Hetty Lange, NCIS

In times such as these, investors are bombarded with statistics, data and real-time information on markets. Their natural inclination is then to take some action and make quick changes in their portfolios. The last thing investors think that they should be doing is sitting on their hands – but sometimes that’s exactly what such a situation requires. Not all information is necessarily actionable or needs to be acted on.

You may be familiar with the saying that the two most important days when investing are the day that you buy and the day that you sell. The former determines the potential return that you can generate from the investment: you will buy it on a particular yield, and the higher that yield, the better your possible return will be. The latter seals the return that you have generated from it, so you need to be sure that you have maximised its potential or that you have minimised your losses.

It may sound clichéd, and for some a very difficult thing to do, but at times like this, on balance, it’s best to stick to your plan and adopt a wait-and-see approach.

4.     If you want to see the sunshine, you have to weather the storm – Frank Lane

There are many ways to weatherproof and protect a portfolio for uncertain and unexpected times. These may include using appropriate asset classes and diversification, but the one that I want to emphasise, and which is probably the easiest to achieve, is simply matching your liabilities to your liquidity.

You don’t ever want to be a forced seller who has to lock in any short-term losses. So by matching your liquidity to your liabilities, you can ensure that you are a planned seller in the market.

Let’s explore this in more detail. If you ensure that you have enough cash to cover your known and predictable expenses for the next roughly 24 months, then you will not need to sell assets should something untoward occur. When considering your expenses, take everything that you need for your day-to-day living into account, including housing, transport, food, entertainment, education, and even items such as a wedding, vehicle replacement or overseas holidays.

Then look at your spending requirements from 24 months to the end of year five or six – let’s call this the prudent category – and carry enough to match these liabilities in assets with low volatility such as bonds, hedge funds and protected equity.

Funds or monies that you have in excess and surplus to your living requirements from years five or six onwards should be placed in growth assets such as local and global equities.

Just by following this simple formula of matching your assets with liabilities and always, or at best, ensuring that you are never a forced seller but rather a planned seller, will go a long way to giving you peace of mind and the comfort that you are avoiding any unnecessary losses.

To sum up:

·         Have a plan with built-in shock absorbers

·         When things go pear-shaped, stick with the plan

·         Check if you need to adopt a wait-and-see approach

·         Match your liquidity to your liabilities

At Citadel, we follow these four guidelines as investors ourselves, and we guide our clients with their financial plans to adopt the same four steps in establishing and following their financial plans. We know that life will always throw us curve balls – we just don’t know when. As long as you are well prepared, you will be able to pull through financially.

Andrew Möller, Chief Executive Officer, Citadel