OK, here we go again! As I am writing this the Greek government is unable to manufacture a coalition and the French have, unsurprisingly, moved to elect a President that has promised no/lower austerity measures. Yesterday the world stock markets trended lower by between 1 and 2% as market traders tried to work out the consequences of these developments.
As an aside, one thing that has not seen a lot of airtime is that the politicians in many of these countries are cutting back on social pension benefits. This is because pensioners are a soft political target. It happened here in South Africa as well, civil servants got an 8,6% increase and social pensioners only 6%.
Amongst all the negative headlines I spotted this one “Warren Buffet says he’s buying stocks amid market dip”. There is a simple rule being followed by Warren Buffet; one must buy assets when they are relatively cheap, not expensive. Although we all know this is true when shopping at a supermarket, it also is true of investment assets like shares, listed and other property, Bonds etc. So any market weakness is a time to be buying not selling. The real skill of Warren Buffet and fund managers in general lies not in whether to buy but in what to buy in times like these.
Research done mainly in America but also in the UK shows that somewhere between 80 and 90% of the performance of one’s investment portfolio whether it is positive or negative is generated by the asset mix of the portfolio. These assets are; Property (usually listed), Bonds, Cash and Equities (other than Property). So if your portfolio falls by, say,10%, somewhere between 80 and 90% (8-9%) of that loss relates to the asset mix that you chose, the rest (1-2%) has to do with market timing (the decision by a fund manager when to buy or sell a particular share) and the shares that a fund manager bought (stock selection).
There is a very big ‘however’ or irony in the statement above. The decision about asset mix (how much in Bonds, Cash, Property and Equities) relates to each individual’s financial lifestyle requirements weighed up against how much volatility he/she can tolerate. No fund manager makes these decisions for you. You decide your lifestyle and our task as your adviser is to select the most appropriate fund manager/s to manage that targeted mix of assets.
A word (or two) about Mandates
One of the overlooked factors in selecting a fund is answering the question; What is the fund’s mandate? The mandate is a statutory and/or contractual requirement that reflects the agreement between the Fund manager and the investor. So for example, a unit trust that has an equity mandate usually may not hold less than, say, 90-95% in listed equities. The important thing to realise is, even if the fund manager of this fund is convinced that the equity market is about to collapse he/she may not disinvest from the Stock Market or he/she will be in breach of his/her contract (Mandate) and have broken the law.
Because of the above facts, a number of fund managers have made funds available with a broader mandate. These are the so-called “flexible” or “managed” funds. In these funds the manager’s mandate allows a shift in the asset mix. The manager can move between property, equities bonds and cash. So these funds are generally less volatile, but they still do not link with your own targeted financial lifestyle and selection of which of these funds to invest in remains your decision.
As a rule of thumb if you have more than 7-10 years to go before you will need to use your invested funds, then you can select a fund with a high equity content/mandate. These funds should generate high returns to compensate for high volatility. On the other extreme if you have less than 3 years to the point where you will need to use the accumulated investment, the fund selected should be a lower volatility which of course means that the returns will be lower.