Have Low Risk investments turned into High Risk investments?

By Wesley Moodie, Financial Advisor at Reid Raetzer Robsons

At the start of 2020, South Africa had extremely high real rates (interest rate less inflation rate) compared to the rest of the world. This gave local investors an alternative to investing in the local stock market that has moved sideways for six years. With interest rates now dropping 2.25% in just a few months, and scope for further rate cuts, this means that money in the bank is no longer as attractive as the gap has closed between the local interest rate and the inflation rate. 

While there is evidence of deflation globally (falling stocks, crashing oil prices, real estate likely under pressure) there seems to be “whispers” of global inflation fears rising in market commentary – inflation being the devaluation of currency. This fear largely stems from the massive stimulus programs that governments and central banks are undertaking to revive their economies  – which the markets appear to be ever increasingly dependent on.  

While the actual inflation/deflation outcome is up for debate it is important for an investor to ensure that they have adequate protection in their investment portfolio against various outcomes.

Case Study:

An investor in the USA who bought the Dow Jones (stock market) in early 1966 would have had to wait until the end of 1982 to see a positive return in a period when the stock market went into a “sideways channel” for 17 years. 

During this period inflation went from under 2% in the USA in January 1966 to just under 15% in 1980. Although interest rates adjusted over time the end result for cash would still have been a poor or negative real return over much of the period. 

Where one asset class performed terribly another rose from the ashes: gold increased from it’s peg of $35/ounce in 1966 to over $800/ounce in early 1980 although later losing some of those gains. Crude oil prices rose from just over $1/barrel to over $32/barrel during the same period. Real estate also proved to be a good inflation hedge.

A few points can be taken from this study above:

  • The statement that “stock markets always go up in the long term” is misleading. There are countless examples of global stock markets not increasing in value for a time much longer than “long term.”
  • Asset allocation (choosing between shares/commodities/cash etc) can be as or more important than security selection (i.e. choosing which shares to buy.)
  • An investor who is too conservative can increase their risk of loss in the long run when adding the effects of inflation.

In applying these points practically to an investors portfolio: “de-risking’ can either be done by choosing different asset classes at appropriate times OR by choosing asset managers who use uncorrelated strategies and investment philosophies. As an investor it is important to team up with a manager or advisor who understands the inherent risks in being too aligned to one strategy or in dismissing certain asset classes because it doesn’t fit their philosophy.  If you’d like to discuss your investment portfolio with us, you can make an appointment here


About the Author

Wesley Moodie is a Financial Advisor at Reid Raetzer Robsons and holds the Chartered Alternative Investments Analyst designation. In his former life he was a professional tennis player ranked in the top 100 in the world in singles and top 10 in the world in doubles. He can be contacted by clicking here: WESLEYM@RRIB.CO.ZA