Why doing nothing is an option when it comes to your investments
Amid volatile markets it may be best for investors to sit back and stay calm
“Why is doing nothing an option?” a client asked the day after Nhlanhla Nene was fired as finance minister, and the local stock market was crashing. As an executive in a large organisation her instinct was to respond with some action. When I suggested she do nothing about her investments, she was very uncomfortable. “Surely we should do something,” she demanded.
The answer I gave her has relevance now given the challenges investors are facing.
Financial markets can be classified as complex adaptive systems (CASs). In a CAS many independent agents (investors, for example) interact, leading to outcomes (a market crash) that are often difficult to predict simply by looking at the individual interactions. There is no centralised control mechanism that governs the system’s behaviour.
An easy way to explain a CAS is to look at traffic patterns, especially during peak times. The traffic system has a set of explicit and implicit rules.
On the way to work there may be an accident on your route. Every driver is an agent thinking and acting independently. Upon hearing of the accident, drivers decide how to react. Some continue driving on the route hoping the accident will be cleared by the time they get there. Others choose an alternative route. Some drivers are unaware and carry on their normal route.
As each of these agents makes independent decisions, patterns start to emerge. Agents may modify their decisions, leading to other patterns to form. A driver’s best strategy in this scenario cannot be known upfront. If you take another route that many others decide to take as well, you may be equally delayed.
Drivers who “do nothing” are also making a decision (informed or not) and contributing to the emerging patterns.
Complexity results from the interrelationship, interaction and interconnectivity of the elements within a system and between a system and its environment. This implies that a decision or action by one part within a system will influence all other related parts but not in any uniform manner.
Massachusetts Institute of Technology student Serena Chan in her paper on CAS states that they “function best when they combine order and chaos in an appropriate measure”. This suggests that financial markets require some investors to do nothing and behave in a more calm and measured manner for the system to function.
Does this mean investors should never do anything about their portfolios?
Certainly not, times like these are a good test of the robustness of a portfolio. As an investor you should certainly look how your portfolio has performed, relative to a suitable benchmark. Now would not be a good time to make changes, but it is certainly a good time to assess and note any strategies that should be reviewed at a later stage.
Markets are incredibly volatile now because of the Covid-19 fallout globally, and South Africa’s downgrade to sub-investment grade. It is difficult to implement decisions in such an environment as the delays during implementation could see investors lock in permanent losses.
The JSE has lost over 10% in one trading day in March and gained over 6% to 7% on other days. This is not the environment in which to make switches to your portfolio.
On my way to work recently I found myself stuck in a traffic jam due to an accident. I did not have the energy to think of alternative routes and carried on towards the accident. Fortunately, the traffic department arrived on the scene and started directing traffic. I got to work a lot faster as a result of that intervention.
Global authorities are on the scene of the current economic crash and are affecting patterns in the market. Investors may, as a result, do well if they simply stay the course for now.
• Gradidge is co-founder of Gradidge-Mahura Investments and holds the Certified Financial Planner® designation.