By Wendy Myers
The recent sharp downward movements in financial services stocks have been a cause for concern among investors. US listed Silicon Valley Bank's demise and JSE listed Transaction Capital's declining share price - down to levels last seen at the height of the Covid stock market collapse - have left many wondering if these events are transient or indicative of something more systemic.
As an investor, I believe that volatility is an inevitable part of investing in shares, especially in the short-term. We are currently in the midst of unwinding the imbalances in the global monetary system after years of highly accommodative monetary policy. This normalisation of interest rates has had a profound impact on the market since 2022, and we have been cautioning investors to expect this volatility for some time now.
The real challenge for investors is to view their portfolios holistically, not to panic, and not to make any resultant poor investment decisions. Proper diversification is crucial as part of a broader risk-management strategy. This begins with ensuring your portfolio includes a spread of shares across different sectors and geographies. Currently, a high exposure to financial shares will put your portfolio under strain, so it is advisable to spread investments across multiple sectors and avoid having a key or main exposure to financial stocks.
It is also important to consider the risk profile of the companies that you select. High-risk or growth stocks that showed material gains during the Covid years are now taking pain, and we typically recommend that investors have not more than 5% of their total portfolio invested in these stocks, or avoid them completely, depending on their own risk profile and time to retirement.
These recent events also force us to reassess our risk and to look at our portfolios in the context of how they are constructed and set up for the long-term. Equities will always remain a key asset class to build long-term wealth, so investors should not avoid equities completely. Rather, it is essential to view your portfolio holistically and ensure it is constructed to meet your long-term needs.
In addition, it is also vital to avoid knee-jerk reactions to market movements. As investors, we tend to be emotional and do not like losses. However, reacting impulsively to share price moves during a bad spell, due to macroeconomic factors, can have a detrimental impact on long-term outcomes and may negatively impact your ability to meet your long-term financial goals. A well-diversified portfolio can and will reduce an investor’s stress and remove the urge to react and the need to tinker with it.
As an investor matures and their portfolio becomes more substantial, we strongly advocate that they work with a financial adviser who can annually assist them in reviewing their portfolio's construction. The adviser can guide the investor when considering macro events and how they impact current portfolio construction. This is where well-adjusted rebalancing can occur to ensure the portfolio is set up for the long-term.
It's essentially not about selling out of stocks but making sure that those stocks you're invested in, have strong fundamentals. Sometimes, taking some profit off the table or even realising some small losses in the short term set the investor up for long-term gains.
Ultimately by viewing portfolios holistically, avoiding knee-jerk reactions, and working with a financial adviser, investors can manage risk and set themselves up for long-term success.
Wendy Myers is Head of Securities at PSG Wealth
** The views expressed do not necessarily reflect the views of Independent Media or IOL.
WASHINGTON POST