Protecting wealth in uncertain times

You have heard it said before – “hedge your bets”,  “don’t put all your eggs in one basket” or “diversify, diversify, diversify”. This rings truer than ever as we watch in disbelief the events unfolding between Russia and Ukraine.

Long term wealth is made in the bad times. If your portfolio is properly positioned when markets fall, your drawdown is less and you need less performance to recover. For example, if your portfolio drops 50% you need to make 100% to be back to where you started!  If it drops 10% you need to make 11.1%.  So, the less the drawdown in volatile times, the easier it is to recover and get back on track.

Last week when Russia invaded Ukraine, the MSCI Russia Index dropped 38% in a single day!  That would really hurt if all your money was invested in Russia.  The Ruble has lost 73% of its value since it peaked against the dollar in 2008.   The performance of the Rand over the same period doesn’t look too bad. It doesn’t feel like it when we remember the spike at the beginning of Covid when the rand was trading at R19 to the dollar. We tracked the Ruble quite closely until 2015 and since then, although the movements have been in tandem, our performance has been much better. In fact the rand has strengthened considerably when contrasted against the Ruble since 2020. Just look at the spike since Russia invaded the Ukraine.

Five years ago, Naspers was growing fast and the share price was rocketing. It was the darling of the market. The weighting in the All Share index grew to close to 25%. Holdings in portfolios increased in size too and we all know it’s dangerous to have so much exposure to one company. Fund managers who were benchmarked against the index presented graphs showing how the index was performing when Naspers was excluded, to justify the underperformance of more conservatively managed portfolios.

The outperformance lasted until early 2021. Since then the share price has fallen by 55%. If your portfolio held 10% in Naspers, 5% of your real wealth has been lost. Big holdings are dangerous. When a company is “shooting the lights out”, it’s difficult to see where the story will end. But it always ends.

Thank goodness for resources, which returned 36.3% over the past 12 months followed closely by financials with a 34.9% return.  The industrial index, which has a lot of exposure to the Naspers behemoth, is only up 1.8% over the last year.  How things change. Don’t forget, in 2016 Anglo American was trading below R100 per share. 5 years later it’s over R800

There are many examples – the ten lost years on the S&P 500, the recovery of the rand from R15 to R6 in 2003, the South African property sector which couldn’t put a foot wrong, oh and Bitcoin in 2017.

The point of investing is to slowly and surely build your wealth by keeping things simple.  Never bet more than you can afford to lose (sweetie money) on a speculative bet. Be patient, be consistent and be diversified to enjoy the benefit of long-term compounding.

In times of crazy volatility, it often feels easier to jump ship and flee to safe assets such as cash or bonds, but this is when the best opportunities in growth assets present themselves.  Hold on tight and use this opportunity to rotate into quality companies and funds.