While the dislocation in financial markets is unnerving, it certainly is a good stress test of investment strategies. Evidence that your portfolio is working as expected is far more valuable than hearing that none of this volatility will matter in the long run.

That is scant comfort to anyone who has seen their modest investment gains, accumulated over the past however many years, wiped out in a matter of days. It also won’t fill them with confidence that a high-equity fund is the way to go, or that they aren’t better off earning lower but more secure returns in a money-market fund. That approach would have returned only marginally less over the past 10 years, but without all the stock market anxiety.

Does derisking your portfolio work? No doubt the thought has crossed your mind: what if something like this happens just before I retire?

If nothing else, investors should be reassured at this time — when so many calamities have come together in one toxic mix — that they are shielded from the worst of the market fallout, and that their pension would have been safe even if retirement was just around the corner. In the financial world it’s the stock market that grabs the headlines, so much so that you might believe your fund value depends entirely on how well the JSE is doing. Which, in March, was not great. At one point it was 36% off for the year and 25% down in one week in anticipation of the fiscal and economic fallout from the pandemic.

Fortunately, it is not just about the JSE. Most retirement portfolios hold a variety of investments, which all react differently to the news cycle. A typical balanced high-equity portfolio (the norm for most retirement savers) will invest 25% to 30% offshore, mainly in foreign shares, providing exposure to different currencies, economies and sectors. Amazon, Alphabet (Google), Apple and Netflix may not be listed in SA, but you probably own a piece of these companies anyway, through your fund’s offshore allocation.

Main driver

Apart from gaining exposure to high-growth industries elsewhere, local investors also benefit from the rand weakness that usually attends a global market crash (as is the case at present). This moderates the impact of falling share prices overseas and makes portfolio returns less volatile. A balanced portfolio will also diversify into cash and government bonds, which tend to hold their value better during a share market crash, as they did again this time around. All of these buffers would have supported your portfolio during the market meltdown.

Does derisking your portfolio work? No doubt the thought has crossed your mind: what if something like this happens just before I retire? The good news is that if you follow a risk-appropriate investment strategy it shouldn’t affect your pension much, if at all. Besides fees, the main driver of your fund return is asset mix. This refers to how your savings are allocated between the different types of investments, mainly company shares, bonds and cash. Shares are described as either high growth or high risk, depending on your time frame. They promise the highest return over time, but the short-term return is variable and even sharply negative some years.

Investing in the stock market over many years is a great way to build wealth, provided you hold on during the occasional market correction and lower your exposure as your time horizon to retirement shortens. You do this by switching more of your savings into cash and bonds. These are classified as either defensive or lower-risk assets. They deliver more modest returns, but with little risk of a negative surprise. They are thus useful in preserving wealth. A gradual transition from growth to defensive assets near retirement ensures that a market crash does not permanently reduce your pension. This strategy also performed well during March.

In these times the investment industry regularly reminds savers to focus on their long-term goal and to ignore the immediate market swings, because these won’t matter by the time they retire. But that ignores the emotional toll of this pandemic. It may not threaten long-term retirement plans, but it does pose an immediate threat to their health, livelihood, lifestyle, and to their trust. While this period will one day present as just another jagged edge on a long-term chart, a huge destruction of asset values and wealth perceptions, followed by a protracted recovery (as happened during the Great Depression in the 1930s, for example) will leave deep scars and negatively affect investors’ tolerance of market risk.

This is usually to the detriment of their long-term return. Notwithstanding all the “keep calm and carry on” messaging, it will cause some to lock in their losses anyway, by switching to a more defensive portfolio. In the face of these vulnerabilities, investors should feel reassured by the resilience of their portfolio, and that their investment strategy is performing as expected.

• Eddy is head of investments at 10X Investments.