INVESTMENT: Investors Who Overreact to US Vs North Korea ‘War Talks’ Could Risk Significant Portfolio Damage
Recent Western Cape Business News
INVESTORS who get ‘spooked’ by the possibility of a looming war between North Korea and the United States of America should not be tempted to make rash portfolio changes due to this news. It is likely to do more harm to their long-term performance than if investors opt to ride out the pending storm.
Clive Eggers, Head: Investment Analytics at leading wealth and financial advisory firm GTC, says that it is more important to spend time and attention on portfolio construction to ensure it can withstand known and unknown shocks.
“It is understandable that investors become concerned when they see news suggesting the world may be facing another war, but a panic reaction can be extremely detrimental to long-term savings.”
Market volatility has increased sharply following a ‘war of words’ between the US and North Korea over the past week, raising fears of a nuclear war.
“This is certainly a significant tail risk – that is, a risk with potentially large consequences but with a low probability of occurring - but we caution against overreaction to such probabilities.
“We believe it is preferable l to err on the side of caution and prudence, whilst holding a strategically diversified portfolio with buffers against the market’s unknowns. With a good long-term strategy, it is not necessary to react to every threat presented by the market, as these often appear much larger in the moment than in reality.”
To Eggers’ point, immediately after news broke of American and North Korean tensions, there was an uptick in demand for so-called safe-haven assets such as gold and cash offering protection and value, though these assets aren’t necessarily linked to investors’ objectives.
“We did not think this would have been an appropriate move for our clients, because reacting to short-term price changes will not help them achieve their investment objectives. We have already seen a pull-back in these ‘safe-haven’ assets’ prices,” he explains. “In addition to maintaining a diversified portfolio, we also aim to include strategies that are focused on preserving capital and minimising losses when markets experience downturns.”
Eggers adds that today’s interconnected world and the growing number of global companies on the local stock exchange have significantly increased tail risks – alongside opportunities, over the past decade.
“This has meant that investors need to exercise discretion when making subtle adjustments to portfolio construction as and when fundamental changes occur. At GTC we have also engaged in considerably more scenario testing so that we may better see the effects of various events on our portfolios.”
He explains that this type of eventuality testing takes into account a number of factors directly related to a scenario, alongside elements that are indirectly connected to an event, and this process ultimately determines which strategies would work best under a wide range of differing circumstances.
“GTC’s scenario testing capabilities have enabled us to monitor events and markets on a daily basis, while staying focused on the bigger picture and long-term investment goals,” he says.
“However, while modern tools have helped significantly in planning for portfolio construction, investors cannot rely solely on these modelling functionalities. No two events and its impacts are the same, and every investor’s risk appetite and goals differ, so there can never be a standard solution that fits all scenarios.”
Eggers concludes: “The most important thing is to trust in the investment planning process put in place with your financial advisor or asset consultant, and not be tempted into reacting to volatile short-term movements. Investors who stay focused on their long-term goals generally ride out these short-term storms in difficult times with less damage to their wealth than those who attempt to be their own portfolio manager.”
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