Question

I recently received the quarterly statement for my investments and was shocked to see how much they have fallen. What should I do?

Answer

When you open an investment statement and see a sharp fall, it is completely natural to feel anxious. Your immediate instinct may be to switch funds, move into cash, or take some drastic action to stop the damage.  In most cases, that is exactly the wrong thing to do.

A quarterly statement is only a snapshot of a relatively short period in the life of a long-term investment. It tells you what happened over three months. It does not, on its own, tell you whether your investment strategy is wrong.

Investments that are designed to grow above inflation will have bad quarters from time to time. This is especially true if your portfolio has exposure to shares, listed property, offshore investments or the rand. These assets are volatile. They move up and down, sometimes quite aggressively.  That volatility is not a flaw in the system. It is the price you pay for long-term growth.

 I always encourage clients to look at the purpose of the money before reacting to the performance.  Ask yourself: when do I need this money?

If you need the money in the next year or two, it should not be sitting in a highly volatile portfolio. That money should generally be in cash, money market, income funds or other lower-risk investments. You do not want to be forced to sell growth assets after a market fall.

If you need the money in three to seven years, you can take some risk, but the portfolio needs to be carefully balanced. You need some growth, but not so much volatility that a bad market wipes out your plans.

If you only need the money in seven years or more, then you usually need meaningful exposure to growth assets. That means shares, offshore markets and other assets that can be uncomfortable in the short term but necessary over the long term.

This is particularly important in retirement.

A person retiring at 60 may need their money to last 30 years or more. If they move everything into cash because of one bad quarter, they may avoid short-term volatility but create a much bigger long-term problem: their money may not keep up with inflation.

You mentioned that your investment has fallen sharply. One of the reasons markets have been so unsettled is the current geopolitical environment.

War, oil-price shocks, inflation fears and uncertainty around interest rates all create volatility. Markets hate uncertainty. When investors become nervous, they often sell riskier assets, and prices fall. But markets also recover very quickly when the mood changes.

We saw this pattern recently where markets fell sharply in March but started picking up again in April. That is why it is dangerous to make emotional decisions during the worst part of a market sell-off.

By the time your statement arrives, some of the bad news may already be reflected in the price. In some cases, the recovery may already have started. This does not mean you should ignore what is happening in the world. It simply means that the evening news is not an investment strategy.

Check whether your portfolio is still right for your needs

The correct response to a bad quarter is not panic. It is review. You need to ask whether your portfolio is still appropriate for your needs.

• Is it too aggressive for your stage of life?
• Is it too conservative to meet your long-term goals?
• Do you have enough cash or low-risk investments available for short-term income needs?

These questions matter far more than one quarterly return.

Compare your portfolio with the correct benchmark

You should check how your portfolio performed compared with similar investments. If all balanced funds fell during the quarter and your fund fell by a similar amount, then the fall may simply reflect normal market weakness.

However, if your portfolio fell far more than comparable funds, then there may be a deeper problem, and a change could be needed.

If your review shows that the portfolio is flawed, then a market dip may be the time to change the portfolio as the capital gains tax cost of switching will be lower than normal. You may be able to move into a better fund or a more suitable structure before the recovery has fully taken place.

But this must be done for the right reason. You should not switch simply because you are scared. You should switch because the current investment no longer suits your needs, or because there is a better option available. That is a very different decision.

Speak to a certified financial planner before taking action

Before you sell, switch or move into cash, speak to a certified financial planner.  A good planner should help you separate emotion from evidence. They should look at your time frame, your income needs, your risk profile, your tax position and the relative performance of your portfolio and help you make the right call.