How to invest amidst election uncertainty

South African investors can avoid the pitfalls of investing during periods of uncertainty by not trying to time the market and focusing on long-term investing with a diversified portfolio that matches their risk tolerance.

This is according to Satrix chief investment officer Kingsley Williams, who said that, with South Africa’s general elections around the corner, many may feel tense as the nation waits to see what’s next.

South Africans are set to head to the polls on 29 May. The ANC faces the possibility of losing its majority for the first time since it took power in 1994.

This has caused widespread uncertainty as the election outcome is more difficult to predict than in previous years.

“In an environment of uncertainty, behavioural biases can creep in, with the temptation to make ‘knee-jerk’ investment decisions in reaction to the current climate and perceived market swings,” Williams warned. 

Williams suggested investing steadily and sticking to one’s long-term plan to counter this uncertainty and the consequent biases.

He gave the following advice to help investors make better decisions during times of uncertainty.

Timing the markets

Satrix’s philosophy is to focus on longer-term performance drivers, which aligns with Warren Buffett’s famous cautionary quote on the dangers of timing the market.

The quote ends with this, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

Williams said this extract is often seen as potentially endorsing timing the market, but the full quote encourages the opposite. 

Buffet claims investors have had every opportunity to earn ‘juicy returns’ by ‘piggybacking Corporate America in a diversified, low-expense way’ through an untouched index fund. 

“Instead, they jeopardised their returns by trading excessively or overspending on fund management, making portfolio decisions based on fads and tips, or adopting a start-stop approach to the market through untimely entries and exits,” Williams said.

“In short, Buffet suggests investors focus on steadily building long-term market exposure and not timing entry and exits into and out of the market.”

He said that in a year where half the world’s population is going to the polls, investors would do well to heed Buffet’s words. 

Williams suggested:

• Resisting the urge to act – Much like constantly changing lanes in traffic, one’s best efforts may scupper one’s long-term goals.
• Avoid chasing past winners – Past performance is no guarantee of future returns.
• Not being too defensive – The biggest risk to growing long-term wealth is not taking any risk at all.

He cautioned people to be wary of being victims of their emotions and behavioural biases. He suggests staying the course and keeping costs low. 

Longer horizons

Williams said elections bring the potential for heightened volatility. However, this isn’t necessarily an issue if an investor’s investment horizon is for the long term. 

“Investors who combine strategies with payoff structures that are not too highly correlated and add time for compounding to work its magic are stacking the odds firmly in their favour over the longer term,” he said.

“Research suggests that short-term tactical calls tend to detract more value than they add as they require consistently timing the entry and exit points correctly, as per Buffet’s quote.” 

“Being ahead of the market is not a trivial thing to get consistently right.”

Defensive strategies

However, Williams said that if clients want more defensive fund strategies, they could consider investing in money market funds, bond index funds or ETFs, low equity balanced index funds, or low volatility equity ETFs.

This strategy is for investors who are concerned with short-term volatility and looking to  reduce short-term drawdowns

ETFs and index funds can be an excellent diversifier due to the broad basket of securities they offer.  

However, understanding the index and investment strategy of an ETF or index fund and how this complements the rest of an investment portfolio is key to achieving true diversification.

Stay the course 

Williams said it is impossible to forecast how the elections may move the markets. 

“Forecasting these binary or probability outcome events is not how we approach investing,” he said. 

“Even if we predicted the election result correctly, how the market may subsequently respond is still unclear.” 

“We structure portfolios to provide a through-the-cycle, well-diversified mix of asset classes to match a particular client’s risk profile.”

He emphasised that every asset class has its own risks, which is why a multi-asset class mix of both local and offshore assets is often the best solution. 

This can diversify foreseen and unforeseen risks and provide a smoother growth path to achieving above-inflation returns over the medium- to long-term. 

“It’s always important to match a portfolio to a client’s risk tolerance and investment horizon,” he said.