Given the recent global sell-offs and subsequent recovery in equity markets surrounding the COVID-19 pandemic, a massive amount of investors found themselves in a bit of a predicament. It is more important than ever to understand why your savings might have slumped and what you can do to mitigate these type of risks while understanding the time horizons and asset allocation of your Investments.
The first important factor to take in to account in your personal portfolio is time. You can either be saving money for a rainy day or you might be saving towards your retirement. These two scenarios have majorly different time horizons and hence a different approach.
Rainy day savings need to be liquid and can be needed at any time. For that reason you can not afford to take risks as the time horizon of this investment is short and you may not have enough time to ride out the market waiting for better returns.
On the other hand, depending on your age, retirement savings must be a long term investment and the approach must be as such. If you have 25 years to retirement you can afford to take more risks as there should be enough time to ride out short-term volatility in the market.
So what does it mean to take more risks?
Funds can allocate towards the following asset classes: Local/Global- Cash, Bonds, Listed Property and Equities. Where the most conservative asset class would be Cash and the most Aggressive would be Equities. The fund managers would allocate funds to these asset classes on the basis of the mandate.
Investors that had big drawdowns because of the virus would in most part be because of their exposure in Equity Markets. If used correctly these funds would have been used for longer-term investments and would hopefully have enough time to recover before the funds are needed and performance is reviewed. Investors that are wary of these risks should rather opt for more conservative asset classes but should be mindful of lower expected returns over the long-term.
In conclusion, if correct planning has been done where asset allocation and the time horizon of your investments have been taken in to account, you need not be worried in the short term. Just stick to the plan.
Ruvan J Grobler