Current investors have seen more ‘interesting times’, more black swans and market freefalls, than any other generation gone before.

From the 2008 global financial crisis, followed by the longest bull run in history, to Brexit, several downgrades for South Africa and then the COVID-19 pandemic, today’s investors have run the gamut. Their emotions have run the gamut too, whether they realise it or not.

Our brains on investing

Like being chased by a lion or falling in love, our management of money produces very specific chemical reactions in the brain that are as primal as they are underappreciated. Take a look at how CNBC describes it:

“In his book, “Your Money & Your Brain,” journalist Jason Zweig explains that financial losses are processed in the same part of the brain that responds to mortal danger. As investors see their investment portfolios plunge, our amygdala kicks into high gear. The amygdala plays a crucial role in processing and steering our emotions, such as fear and anger, allowing us to respond quickly to dangerous situations. The ongoing communication between the amygdala and rational input given by the prefrontal cortex can be stunted in times of emotional threat, such as a financial loss. This communication disruption is also known as the amygdala hijack, and, essentially, the prefrontal cortex is disabled, preventing us from making sound, rational decisions.”

First, become aware of the problem

What’s interesting about investment is that, unlike a lion attack or falling in love, almost everyone thinks that they’re not being emotional. Not understanding the basic ‘trading psychology’ as it’s known behind the amygdala hijack lends it power.

We all know the age-old adage of ‘buy low and sell high.’ Never is that more applicable than in market carnage such as that caused by COVID-19 and the 2008 financial crisis. To sell during a bad time, could be to take the biggest loss and miss the biggest opportunity in modern investment history. And we know this, logically, we do. So why do so many people sell anyway?

Because to sell is, for the amygdala, to escape the ‘lion’. It just wants to get out – it doesn’t care that such an emotional move could cost us our retirement.

But if one is aware of the problem, of the trading psychology behind our amygdala screaming at us to sell, it becomes a little easier to emotionally distance ourselves from the decisions.

Emotionally distance

One of the challenges that we all face is overcoming the powerful impulses to escape the lion.

We need to remind ourselves firmly that our emotional urges are not us.

And they are not sacrosanct, we can choose to obey them or ignore them.

Language helps a lot. Instead of thinking ‘I am freaking out’, think rather ‘my brain is freaking out.’ An investor who knows trading psychology thinks: ‘my brain is short-circuiting because of what it perceives as a dire situation’. An investor doesn’t think: ‘I need to get out.’

Also, look for inspiration. Keep a quote by Warren Buffett next to your desk when you do your day-trading, or whatever it might be. Thinking with the wisdom of others, even if it is by proxy, distances yourself from the tunnel vision which is so easy in a moment of panic, which tricks us into thinking that the way a problem appears to us is the only way to look at it. For example, to look at COVID-19 or Brexit stock market crashes as a disaster rather than an opportunity.

Don’t aim for being a robot

The aim here is not to suppress all emotions until you have none as an investor. Completely emotionless investing, as most experts will tell you, is a myth. Feel the fear, but don’t let it master you. Emotions are important, but we need to be able to deal with them in a positive manner.

Get help

Good, solid financial advice is invaluable – especially in tough times when emotional reactions are likely. Seek out a financial advisor who understands volatility and let their experiences work for you.

Ensuring that you don’t make any investment decisions or portfolio changes without your adviser’s input is also a handy way to not act in the spur of the moment. You may wake up at four in the morning worrying about your retirement, convinced that you need to dump all your equities immediately, but in the cold light of day such kneejerk reactions might look very, very different.

Ultimately, it’s you and not your emotions that are in charge when it comes to managing your money. Keep that in mind and you’ll be able to weather the storm ahead.

The last few years have seen more market volatility than anyone could have predicted, with the icing on the cake being the COVID-19 pandemic. But the best and worst thing about markets is their cyclical nature. All markets recover, eventually.

We know what to do when there’s a downturn and experience has taught many investors some hard lessons with recent stock market crashes. But what about an upswing? What do you do when the markets recover – and what should you avoid?

Don’t.. let it get to your head

Sometimes, it’s helpful to think of the stock market as a wild animal: make no sudden movements. Just as good financial advisers tell people not to panic and sell low in the nadir of a stock market crash, people should also not get overly excited when markets start recovering and buy everything in sight.

An economic downturn is not the time to cash in your retirement and an upswing is… also not the right time to do it. So, when is?

Do… keep to a big picture plan

The best time to do something like cash in your retirement savings, add something new to your portfolio or dump certain stocks is when it works in line with your long-term goals, specific to your goals and your risk appetite as carefully thought out by you and your financial adviser.

If you watch only the market, you will be tempted to buy and sell everything you own several times a day. If markets are nose diving but you are thirty years away from retirement, that nosedive has absolutely nothing to do with you. Keep to a long-term plan as worked out by your financial plan to avoid going crazy and not being blown about by every single headwind.

Do… stick to the classics

Tried-and-true brands and names that have stood the test of time are likely to survive your long-term plan. Go for “Think of your Warren Buffett-type companies: the Visas, the Microsofts, the Coca Colas of this world… the biggest companies that you are 100 per cent sure can get through recessions, coronaviruses, or any other panics that may come along,” advises David Coombs on This is Money.

If the markets are just beginning to recover, you can likely acquire stocks at a lower price than usual. Just make sure you get it before they get too expensive again.

Don’t… go it alone

There is a reason why financial advisers, wealth managers and stockbrokers have full time jobs. Not only is being able to deeply understand the stock market a very hard-won skill honed over years, it’s a very risky one that can turn on you at any moment.

The value of expert financial advice is irreplaceable when it comes to anything on the stock market, even seemingly simple scenarios like a market recovery.

Oh, the ironies of life… 

One of South Africa’s most contentious laws regarding annuities states that a retirement fund may not be completely withdrawn in a lump sum, but a minimum of two thirds must be invested into a compulsory living annuity in an attempt to aid preservation of retirement money. Even those who are well informed about their retirement money sometimes forget this element of their annuities.

Then along came the Coronavirus pandemic with global lockdowns.

On 23 April, Treasury announced new living annuity drawdown relief measures for COVID-19 that effectively neutralise their living annuity laws.

The new proposed measures are to be disseminated under the Disaster Management Tax Relief legislation, and will be rolled out between 1 May and 31 August 2020.

So, what do we need to know?

Living annuity drawdown changes

Under the existing annuity regulations – the owner of a living annuity is currently restricted to an annual drawdown (which is usually paid monthly) of between a maximum of the investment value of 17,5 percent and a minimum of 2,5 percent, paid out monthly. These were designed to help us avoid spending too much too soon – some agree, some don’t.

This will be effectively side-swiped by two relief measures which once again unlock your annuity – but is that for better or worse?

Changing drawdown amounts

The first COVID-19 concession, obviously thought up for people experiencing cash flow issues in the wake of the pandemic, is that annuitants can increase or decrease their drawdowns (the amount of cash they receive at any one time from their annuity) as soon as they need to. Ordinarily, annuitants can only make such changes once a year at the annuity’s anniversary date and there are a whole lot of rules governing it, so that people can’t ill-advisedly just elect to get higher and higher drawdown amounts and run the risk of their retirement money running out too quickly.

This is a useful concession for one of the worst-hit segments of the population in terms of COVID-19’s financial impact: the elderly. However, the danger is that less financially astute retirees will see this as a nice payday and draw down a large amount and spend it, not taking into account the many years of economic hardship still likely to come from the pandemic. Of course, the other option to decrease drawdown amounts is also there, but realistically, it will be an unlikely choice for many.

Drawdown limit changes

Just as with the above meaning that people can change their drawdown amounts now, the second rule allows for the amount to change as well. The existing regulations attempted to encourage preservation by limiting drawdowns to a maximum of 17,5 percent – now annuitants will be able to withdraw 20 percent. While this number may seem small, it adds up quite a lot when dealing with the large sums in annuities. Think, for instance, of the difference between R175 000 and R200 000 in a modest living annuity. That is R25 000 less for the unknown amount of years still to go which this annuity needs to last for.

Conversely, the minimum amount has also been changed, from 2,5 percent minimum to 0,5 percent, in a bid to encourage people to save more and not less.

The danger, as with almost all things retirement, is that annuitants’ money will run out too soon. And retirement during the fallout of the Coronavirus pandemic promises to be no picnic: we have no idea what the value of the rand, inflation and various asset class values will do in the many years it will take for the world and country to economically recover. Treasury runs a serious risk of annuitants joyfully giving in to instant gratification and viewing the relief measures as a windfall or unexpected extra payday, with an eye on spending rather than keeping a watchful eye on their dwindling retirement savings.

If you have a living annuity or know of someone with one, good financial education is key to understanding the temporary regulation changes and the inherent flexibilities as well as dangers that they hold. Here, as always, sound financial advice is worth its weight in annuities.

Communication around your finances is crucial if you want to be more mindful and intentional around wealth creation.

There are some conversations that will help you ascribe meaning to your money, and these should happen early on in your planning process (and regularly thereafter). Then there are conversations that will facilitate the actioning of your financial plan and will be important when you need to make changes to your portfolio.

Here is a quick guide to five key terms that you’ll hear crop up again and again as you take action in your financial plan.

1. Dividend
A dividend is a portion of a company’s earnings that are distributed to shareholders. The dividends can take various forms but is most commonly a distribution in cash or as a portion of a share of the company. Furthermore, companies have their own policies as to when and how much of earnings are distributed in the form of dividends.

2. Bonds
There are many types of bonds, but in simple terms, a bond is a way of borrowing a sum of money – to be repaid by a fixed date in the future, with interest in the meantime. The buyers of bonds are essentially lenders, which means that if you buy a government savings bond, you become a lender to the local government.

The interest rate received is often referred to as the bond’s yield, and is the compensation that the investor receives for ‘lending’ their hard-earned money. According to an article published by Investopedia, “bonds are often referred to as fixed-income securities because the borrower can anticipate the exact amount of cash they will have received if a bond is held until maturity.“

3. Annuity
An annuity is a type of investment account that uses lump savings to generate a regular income stream – typically these are used for retirement planning.

There are two types of annuities – fixed and variable.

The key feature of a fixed annuity is that you enter into a contract with an insurer who subsequently guarantees a set income for life. This income is dependent on a number of factors such as your age, gender or whether the payment will be level or increasing. The annuity payment is guaranteed by the insurance company, so it is a good option for those who are risk averse (don’t like risk).

With a variable annuity, the risk of the investment is transferred to the annuitant in that her capital (saved money) and subsequent annuity is dependent on market performance.

4. Unit Trusts (also known as Mutual Funds in the US and UK)
According to an article published by The Balance, a “mutual fund (unit trust) is a pooled portfolio. Investors buy shares or units in a trust and the money is invested by a professional portfolio manager” who invests the capital in an attempt to produce an income and capital gains (profit) for the investors. The pool of funds is collected from many investors who wish to invest in stocks, bonds and similar assets.

One of the main advantages of unit trusts are that they offer investment vehicles where smaller investors have access to diversified, professionally managed portfolios in which each shareholder participates (wins or loses) proportionally in the gain or loss of the fund.

5. Asset Allocation
In order to invest your money, you essentially need to give it to someone who will in theory use it to make a profit by working with your assets (invested money), and you then enjoy the profits from that. If they make a loss, you make a loss too. That’s the risk you take.

Asset allocation is therefore the process of deciding how much money, based on your appetite for risk and objectives, is invested in the different available asset classes – such as equities (stocks), real estate (land and property) or commodities (eg. gold and silver).

Being able to talk about your money and how you are working with it is a powerful step in gaining confidence and power over your money, rather than allowing it to have power over you. The more we can learn together, the more we can build the lives that we want and enjoy what we have!

Depending on your level of investing savvy, you may or may not be comfortable with the term ‘commodities’. As our global systems currently enter one of the toughest times experienced in over a hundred years, you may hear this term bandied about a fair amount.

Essentially, commodities are the basic building blocks of the global economy, upon which most other goods are created. They fall into two broad categories – hard and soft.

Hard commodities are natural resources that must be mined or extracted. These include energies such as oil and natural gas, and metals such as gold and aluminium. Soft commodities, on the other hand, are agricultural products such as crops and livestock.

When it comes to investment strategies, commodities and stocks often move in opposite directions to one another. Hence, commodities can offer a good opportunity to diversify an investment portfolio — either for the long-term, or during unusually volatile periods.

Commodities are essentially uniform across producers, and this uniformity is referred to as ‘fungibility’. For example, oil would be considered a commodity, but Old Khaki’s jeans would not be, as consumers would consider them to be different from jeans sold by other stores. When traded on an exchange, a commodity must meet specific standards, which is known as a basis grade.

A commodity market is a virtual or physical marketplace that is dedicated to the buying, selling and trading of raw or primary products. There are currently about 50 major commodity markets in the world that facilitate trade in approximately 100 primary commodities.

Over the past few years, the definition of ‘commodities’ has expanded to also include financial products such as foreign currencies, indexes and exchange-traded funds (ETFs). Technological advances have also led to new types of commodities, such as mobile phone minutes and bandwidth, being exchanged.

Commodities can have a big effect on investment portfolios. Basic economic principles of supply and demand tend to drive commodities markets, so lower supply increases demand, which equals higher prices (and vice versa). For example, a major disruption, such as a health scare among cattle, might lead to a spike in the generally stable demand for livestock.

Slumping commodity prices can also provide opportunities for investors. However, investing in commodities can easily become risky because they can be affected by eventualities that are difficult to predict, such as weather patterns, epidemics, natural disasters, and even politics. As a result, it is important to carefully consider your risk appetite and the length of time you have until you wish to achieve your goals, as this will affect the recommended allocation of your portfolio to commodities.

As with all elements of your portfolio, it is important to ensure you have a solid understanding of what you have allocated and why. Don’t be afraid to ask questions if you’re ever unsure of any terminology.

Anything of any value takes time. Likewise, creating wealth is a long-term process.

Well-structured investment strategies have always taken uncertainty into account. Patience, resilience and a robust strategy are imperative to weather the global investment storm that has been raging in recent times.

As you embark, or continue, upon your journey to great financial security, it is important to wholly understand the investment landscape. This is one of the areas where having an adviser you trust will help you successfully navigate the ups and downs of a stormy market and exploit the nuances of profit-yielding opportunities.

If you experience pangs of fear or doubt along your journey, then it means that you’re taking it seriously and you’re engaging in what’s going on around you. No-one is immune to these experiences.

What exactly has created the stormy conditions?
Recent market events are focussed almost entirely on the effects of the global lockdowns relating to COVID-19, but in the months leading up to 2020, we’ve been seeing volatility in the markets. Some of these relate to oil prices, trade wars between China and USA as well as credit ratings from the big three credit rating agencies — Fitch Ratings, Moody’s and Standard & Poor’s (S&P).

Add in the winds of political uncertainty and the high pressure systems of a fast changing global economy, many investors have at best been treading water or have seen their wealth decline in real terms, as portfolios have largely been unable to beat inflation over the short term.

Goodbye to the Past
It is important to put things into perspective and appreciate that investment markets often go through weaker growth periods of consolidation (this is technically known as a process of reversion to the mean).

Given the current global climate, 2020 and possibly 2021 are likely to be a time of consolidation in the markets. However, if you’re looking to achieve a long-term investment goal, it is important to not be swayed by short-term ideals or emotions, as you have a higher probability of growing your wealth if you stick to your investment strategy.

The Five Steps to Long-term Investment Success and Financial Independence

1. Determine your investment objective by specifying a realistic goal you wish to achieve.
2. Set your time horizon, which is the number of years you have to achieve your goal.
3. Decide on an appropriate investment strategy by selecting a combination of asset classes in which to invest – bonds, property, cash, offshore assets, and equities.
4. Select the most appropriate investment platforms, products and asset managers through which your chosen investments can be made.
5. Monitor and review all of the above on an ongoing basis.

While a great deal of uncertainty remains for all investors, it is important to understand that uncertainty, and even volatility, in investment markets do not only represent risk, they also represent opportunities. Uncertainty is not new, either. It’s easy to blame current conditions, but if your strategy is prepared for uncertainty, if you are in the right headspace, you will be able to remain prudently invested in the markets.

It’s important to remain informed and seek to improve your knowledge about your investments, then keep the various elements of your investment plan aligned to navigate uncertain waters and continue on your journey to wealth creation.

When it comes to investing in the markets, the terms bull and bear market are used to describe how stock markets are doing in general.

Simply put, are they going up or are they going down?

At the same time, because the market is determined by investors’ attitudes, these terms also denote how investors feel about the market and the ensuing trends.

Driving up
A bull market refers to a market that is on the rise. It is typified by a sustained increase in price, for example in equity markets in the prices of companies’ shares. In such times, investors often have faith that the uptrend will continue over the long term.

Typically, in this scenario, the country’s economy is strong and employment levels are high.

Dipping down
By contrast, a bear market is one that is in decline, typically having fallen 20% or more from recent highs. Share prices are continuously dropping, resulting in a downward trend that investors believe will continue, which, in turn, perpetuates the downward spiral.

During a bear market, the economy will typically slow down and unemployment will rise as companies begin laying off workers.

How does this affect investor behaviour?
Because the market performance is impacted and determined by how individuals perceive that performance, investor psychology and sentiment affect whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, investors willingly participate in the hope of obtaining a profit.

During a bear market, market sentiment is negative as investors are beginning to move their money out of equities and into fixed-income securities, as they wait for a positive move in the stock market. This is not always the best move – following the crowd is not always in our best interest.

For those who are able to ride the market out, in theory, will benefit in the long run. The graph above shows us that in the last 90 years, the markets have grown more than they have fallen.

How does this affect the economy?
Because the businesses whose stocks are trading on the exchanges are participants in the greater economy, the stock market and the economy are strongly linked.

A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks.

In a bull market, the reverse occurs, as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.

The Bottom Line
Both bear and bull markets will have a large influence on your investments, so it’s a good idea to take some time to determine what the market is doing when making an investment decision. Having the input from your financial adviser is crucial at this point – but neither market situation is better or worse than the other as both have opportunities and threats to your investment potential.

Remember that over the long term, the stock market has always posted a positive return.

Click here for the article on Investopedia

In a nutshell, the markets are driven by business activity which is supported by investor confidence. When businesses have investors, they can grow and create more value, which in turn encourages more investors. When businesses can’t run normally (like in the case of a global pandemic), investors fear they will lose money and pull out their investments or stop supplying more cash – which hits the businesses even harder.

The interconnected world we live in means we are all affected by movements in other countries. Trade shutdowns and lockdowns on the other side of the world will affect everyone here too.

Whether it’s directly linked to investments, supply of goods to trade, or indirectly through the price of petrol for our cars or the supply and cost of goods in the grocery stores. Some of us will be fortunate not to lose our jobs, but our economy will shoulder the burden of those who do.

Events that knock global markets are often referred to as Black Swan events.

The Black Swan theory describes an event that is unpredictable and which has a significant impact. For example, if we take the effects of COVID-19 (Coronavirus) and add it to an oil war, spice it up with local business confidence being low we have a significant knock to our economy.

The good news is that we’re all in this together. We’re not isolated, which means that we can work together with greater strength and resolve to solve the problems that will stem from a global Black Swan event. We see this in how banks and other large companies step in to assist consumers.

“Recently, the coronavirus pandemic has added uncertainty to global markets. No one can confidently state its impact or for how long it will last. It has already impacted our tourism sector, slowed down economic activity and caused growth forecasts to be slashed. This has led to a large sell-off of riskier emerging market assets reflected in the over 25% drop in the JSE Top 40 index within the last month. The latest global travel bans and the drop in the S&P 500 by over 20% are indicators of the virus’s effect on first-world countries.” 22Seven

When we see words like “economic crash” filling up our Twitter feed, we may rightly begin to worry about our investments.

We have two options: sell now and time our re-entry or wait it out.

The market does recover – this has been proven time and time again over the last 90 years. As it stands, recovery times are, on average, just under two years when in a bear market (watch out for a blog coming soon on bull vs bear markets!).

However, it’s difficult to predict share price movements. This is another reason to not sell investments, as it’s difficult to predict when to buy them back. A good strategy for most would be to continue with monthly capital injections.

(Ideas for this blog come from 22seven)

Here’s the thing about a 20-minute DIY job: it never takes 20 minutes.

Either you don’t have the right tools, or the right skills… or the materials turn out to be too hard, too soft, too big, too small etc.

On the rare occasion, it might take you 20 minutes or less. You might be perfectly suited to it, and have all you need on hand. For most of us – it doesn’t turn out that way.

The same is true for our financial planning. It’s not about relinquishing control, it’s about maintaining a fresh perspective on how you manage your money and making sure it’s being done in the best possible way.

A mentor once said that it’s easy to build a bridge – just pour an excessive amount of cement into the valley where you want to cross. When we think about this ridiculous idea, we realize how important engineers are.

Again – the same applies to accepting the need for a financial adviser, planner or coach. You can spend your money on whatever you want, but is that going to work out well for you? You can choose any risk or investment products you want online, but will those work out well for you?

If your money was cement, and you had to build a bridge to your future self, wouldn’t you want to have plenty of cement to make it across safely without running out of supplies in the first four meters?

A financial adviser will help, but you need to know what kind of adviser will suit you best.

Independent vs tied financial advisors
An independent financial advisor is someone who offers advice on products from multiple service providers. They usually work for themselves or are part of a group of independent financial advisors.

On the other hand, tied financial advisors will only provide advice on products their company offers. They typically have a deeper knowledge of a narrower set of products. There may be convenience or rewards related benefits when dealing with a single provider.

It’s important to identify which type of financial advisor you’re dealing with before signing any contracts with them.

Commission-based vs fee-based rates
Commission-based advisors are paid a commission on the products they sell. They are paid when the investment is made or the insurance policy is taken out and their advice is tightly coupled to the products they sell. However, they don’t charge a fee for meeting you.

Fee-based advisors charge a fee for advising you regardless of whether you purchase a product. There are advisors who operate a hybrid of these two structures and will benefit from both giving advice and selling products.

Fees will have an impact on the value of the investments you make and the insurance premiums you pay. Although they may sound burdensome, they are usually negotiable, so it’s worthwhile having a conversation about.

Don’t wait until you have lots of cement… uh, money.
You don’t need to be wealthy to have a financial advisor – this is a common misconception. You do however need a solid stream of income and a positive commitment towards making your money grow over time.

(Definitions from 22seven)

Autumn is a precious time of year and is perhaps an altogether more positive metaphor for another special time: the tail end of middle age when we are far from elderly, but far from young.

You look up one day and realise that while you were busy building a life with your family, or perhaps pursuing a fulfilling career, the years rolled by more quickly than you thought. There’s still time on the proverbial clock, but you’ve now reached the autumn of life. What can you do to ensure financial stability?

Just like autumn, this age is a time of rich maturity and transformation, pausing to enjoy the comforts of life you’ve stacked up for yourself and settling in for the winter.

The ‘autumn of life’ also, however, requires a completely different financial strategy and mindset. Here, some top tips for navigating your own ‘autumn’:

Hold to a relatively firm budget

By the time you’re in your mid to late fifties, the kids have most likely flown the nest to build futures of their own and if you’re fortunate, you may have already paid off your bond. This newfound financial freedom might tempt you to spend more extravagantly but now more than ever, a level head will be your best asset.

When you’re out with friends, entertain modestly and resist the urge to pick up everyone’s tab for the sake of appearances. At this point, you shouldn’t feel the need to impress those in your social circle.

Another important thing to bear in mind is that while you’re still an active member of the workforce, you should increase contributions to your retirement fund as much as possible.

Be an adviser to your children, but not an endless safety net

If you have kids, your natural inclination will always be to help them in troubled times, no matter how old they get. While admirable, your parental instincts must be balanced with a pragmatic approach to the shifting realities of your own life.

The fact is that very few older parents are in a position to act as an eternal wellspring of material resources and even if you are, the better course of action is to raise children with the strength and independence to stand on their own feet.

Never be afraid to learn something new

If there’s one tip that older professionals should consider taking from their 20-something counterparts, it’s the value of being willing to adapt to change and acquire new knowledge. With the plethora of reliable educational resources available online (often at low or zero cost), self-driven learning has never been easier.

Retirement expectations are changing fast too. With a combination of well-earned experience and some freshly developed skills, you might even be able to bolster that retirement fund with an entrepreneurial endeavour that only begins in your sixties.