I am sure most South Africans are very apprehensive about their investments. The markets are gruelling and bruising and unbelievably volatile. What should investors do now to protect themselves in the months ahead? I have some suggestions.
Bullet proof investments. If one accepts that the world is becoming a smaller and smaller place because of technological advances, the free flow of information and the internationalisation of markets, then investors must realise that there are very few safe havens out there – but there are some.
I cannot predict all the gathering summer storms but there are some that are pretty plain to see. South African investors must learn to cope with a lack of international competitiveness and massive inflation in some areas and a debilitating unemployment rate of 27 percent. The government’s biggest challenge is to convince investors that South Africa is a viable investment destination and that Africa is not only of utility value.
It is now most critical to ensure that your portfolio is properly diversified in terms of countries, currencies and individual companies. This will have the dual advantage of reducing volatility in values and increasing returns. Never before has it been more important to have a properly structured and internationally diversified portfolio. If you search the world you will find more bargains and better bargains.
The portfolio must be exposed to the correct currencies and there are some exciting prospects out there. Take a look at New Zealand (NZ Dollars) – a fantastic country, growing rapidly with a most stable government and great tourism and energy investment prospects. New Zealand also has a major competitive advantage in agriculture and food security.
The Swiss Franc is also worth consideration. Switzerland is more sheltered from the economic and political storms hammering the rest of Europe.
Of course, there is also the mighty American Dollar. No portfolio can be considered complete without some exposure here.
Never adopt any strategy blindly. Investors must always remain flexible, open minded and sceptical. Keep an eye on the back door and plan your exit strategy. An above average return can only be achieved, mathematically or by definition, if you act differently. Change the types of investments and change your method of selection.
Make sure your portfolio is flexible, defensive and that it can be modified quickly. You need a significant cash balance for exciting opportunities and the stocks selected must have defensive characteristics. A very good idea is for investors to put their portfolio aside and on a blank piece of paper structure a new portfolio investing a certain cash balance. In other words pretend you are investing say, a cash balance of one million rand in your most favourite investment ideas. If this portfolio differs substantially from your existing portfolio then you have a big problem and you had better move quickly.
Are you happy with the management teams at the companies you are invested in? Are you sure they are honest? Does the company have a track record of profitability and are the risks “controllable”. Is the company generating cash and does it have a growing market share with growing margins. The management teams must be shareholders and the companies must have some blue sky potential.
Achieving a good performance record is much harder than most people think. Apply your mind, work hard or get somebody to do it properly. This is not something you can simply phone in!