BRUCE WHITFIELD: Covid-19 just got personal
What times like these teach us is that long-term wealth is created through a mixture of resolve to look through the noise and the ability to hold your nerve
I was handling the lockdown just fine. Then I got the first-quarter statements for my retirement annuity. Now, suddenly, it’s personal.
You can intellectualise cycles and look back at 100 years of graphs and plot how previous crises merely appear as blips on a line on a screen, but the moment a historical event costs you money and you consider the long-term consequences of that value destruction, it hits home. Just as it did to investors in 1929, 1987, 1999, 2008 and countless others.
This time, though, it’s different. It’s different because this time it’s happening to us. And just like those who lived through previous crises, when you are in the middle of it, it feels like the worst one ever.
My job requires me to try to make sense of financial markets, daily, on the radio. I need to measure the ups and downs and get insights from smart people who, in turn, try to make sense of the factors driving the considerable volatility in the value of investments, and ultimately in all of our long-term wealth.
It’s really nerdy and interesting, and theoretical. Until you open your own investment statement and realise just how vulnerable you are to the vagaries of the world and why it is that people behave the way they do when it comes to managing money.
There’s nothing like a financial crisis to test your resolve. This is nothing like the infuriating failures of overpaid management teams at companies like African Bank, Steinhoff, Tongaat-Hulett and EOH whose actions led to you losing money. There you have someone to blame – in times of wholesale capitulation, the only person you will have to blame for losing money is yourself. If investing was easy, we’d all be rich.
What times like these teach us is that long-term wealth is created through a mixture of resolve to look through the noise and the ability to hold your nerve.
Opening my investment statement for the first quarter of 2020 was a sobering reality check of the value destruction brought about by the sudden stop to global economic activity that sent share markets plummeting and had had a direct personal consequence for all of us.
The first warning that I needed to brace myself came when I opened my statement and it was fronted by a letter from the “head of personal investments”. (Does he usually bother? I can’t be sure.) Anyway, I noticed it, and I read it; he blathered on about the global crisis and how it was taking its toll around the world. I was procrastinating. There was nothing new here. But I read each word like you could imagine a death row prisoner might read their warrant of execution, counting every breath before being led to their demise.
“Protracted period” it said. “Market volatility”. Blah blah blah. But it also came with the warm and fuzzy reassurance that the team that invests my money was “constantly assessing the evolving risk and opportunities” that the sharp market drop had brought about. That was all well and good, but by now I was panicking, running out of words to read, and too afraid to turn the page.
The front page had a table showing how in the first quarter, the local share market fell 22.9% and local property stocks 48.1%. To make matters worse, the rand was down 21.6% against the US dollar over the same period – even though that should have mitigated the downside. Global shares were also down by about the same amount.
As if to soften the flow, there was an extra column added, which showed the improvements of 9% for local shares, 13% for property and a slight recovery in global equities during the first two weeks of April.
There was no more to be done. I flicked the page and my eye shot instinctively to the bottom line. There were no percentages on this page to show by how much my modest investment had fallen. There was just a number. I mentally calculated how long it had taken for me to earn that amount of money, and felt instantly sick.
I have no doubt you are going through the same emotions right now. I know you are – I have many of your e-mails. “Should I cash out of my pension fund?” reads one. “The value of my pension has collapsed, I can cash it in, pay the tax and have enough to pay off my bond. At least I will know I will have a roof over my head if I lose my job.”
History suggests that would be a terrible idea.
It’ll bounce back
With a few notable exceptions – which I will go into in a moment – most sharp market falls in recent decades have shown relatively swift recoveries and become those small blips on the long-term graphs I referred to earlier.
Stock markets bounced back quickly in the 1998 emerging-markets crisis, and you made back the money you lost within two months of the market hitting the bottom. It was the same in 2000 and in 2001 following the 9/11 terror attacks in the US, when the very heart of capitalism came under attack. Markets hit a wobble in August 2015 (which I’d forgotten about) and even the recent December 2018 crash feels like a distant memory. By February 2019, you would have lost out on a 19% rally if you had panicked out.
In 2008, it took much longer – a full 18 months – to recover from the global financial crisis, which was characterised by considerable ebbs and flows. But those who continued investing through the cycle were well rewarded as investment markets then soared into their longest bull market in history, until recently. The 1987 recovery took two years. But it was nearly a quarter of a century before the Dow Jones industrial average reached the levels it had attained in 1929.
This is the worrying bit, because commentators are increasingly using words like “depression” and their comparisons are shifting further and further back to the calamity of the Great Depression – a time my grandfather would talk about in hushed tones in his latter years.
So, what about now?
Every crisis feels worse than the last and this one feels just like that – simply because there are so many unknowns. SA is upping the rate of Covid-19 testing and we are seeing large daily increases in the number of new cases and a steady, but mercifully small, rise in fatalities. Some countries that opened their economies are considering new rounds of shutdowns as the virus spikes again. In the US, deaths have passed 50 000, but Italy and Spain have reported their lowest tolls in a month. There are just so many variables and in the meantime the destruction to economies around the world is immense.
The chief investment officer at the company which runs my retirement annuity talked only of “market cycles”. I guess that is his comfort zone. No mention was made of the rising debt burden our country and others are taking on in an effort to mitigate the worst effects of the fallout. He was trying to reassure me that the number I was about to see on my statement did not reflect the current reality of my life savings that I have been contributing to for years. Things would improve, he said.
But do I believe him? We are all poorer than we should be courtesy of the paltry returns of the Jacob Zuma era – while most of the world was enjoying a boom. This latest shock really is a smack in the face.
What do you do?
Financial advisers recommend you don’t check up constantly on the day-to-day movements of your long-term savings – that’s enough to drive you mad. It’s good to check in occasionally, though, as I have done, so that you can stay abreast of your financial reality.
Please don’t cash out your retirement fund, though it is massively tempting to do so, especially since April showed a sharp recovery in stock market performance. You may want to lock that in and go and buy a small hoard of Krugerrands to bury under your stoep, or lock your money away in retail savings bonds at a return of about 10% a year for five years, or take your cash and convert it to dollars at R20/$.
By all means do some of that if it makes you happy, with new spare money you have one day. But cashing in retirement savings, which you will have to pay tax on in unsettled markets, is madness. It may take years before the stock market is fully recovered, but the market corrects itself over time.
If you leave your money where it is, your retirement fund will gradually recover. And if you keep up your monthly debit order, bear in mind that you are buying more units with the same amount of money than you would have bought in January – something which has a powerful compounding effect.
It may feel like you are throwing good money after bad, especially if you topped up your RA in February to take advantage of the tax incentive the government allows and have seen that money (and more) wiped off your statement. But it’s what people who eventually become financially independent do.
There is nothing you can do to fix this crisis other than follow government guidelines and ensure you stay healthy and keep an income that allows you to stay solvent, and hopefully investing. It is out of your hands. The only thing you can control right now is your emotions and how you treat your long-term savings.
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