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In uncertain times, which investments are considered safe?

These are presently very uncertain times in the investment world. Taking a worst-case scenario i.e. World War III into consideration, what investment options are there? Gold, cash, bonds? Which investment could be considered safe?

Dear reader,

If I may quote the famous words of Winston Churchill – “Never let a good crisis go to waste”. These words were spoken during the bleakest moments of World War II (WWII), yet they hold so much truth and hope. In times of controversy and change, there is always opportunity.

The most important principle to remember when it comes to investing, and structuring a resilient portfolio, is that one asset class is not an alternative for another. A well-diversified portfolio including all the different asset classes (cash, bonds, property, equity – both local and offshore) is key.

Asset classes behave differently in different cycles, and for that reason, it becomes so important to combine them to really protect your portfolio through different market cycles.

I think it’s important in uncertain times to go back to the drawing board and define what ‘risk’ really means and the purpose of the investment. There is a difference between risk and volatility. Equity exposure is volatile: there is movement in the market every single day. Volatility is not necessarily a bad thing, and only becomes so when decisions are made at the wrong time. This is the only asset class that has historically provided returns that are above inflation over the longer term – if you remain invested. Timing the market is impossible and this has been proven over and over again.

Therefore, in uncertain times, there are mainly two strategies that work best:

Depending on your specific risk profile, ensure your portfolio is very well diversified with the various asset classes.

Remain invested (this at least applies to the equity components) – this is why cash and bond exposure is normally built in. Should there be shorter-term requirements to access some funds, you have these funds available without accessing equity exposure.

The graph below illustrates the long-term movement in the market since 1950. It is important to remember that, taking a long-term view (and even further back, including WWI and WWII, in addition to all the other market crashes, political and economic uncertainties we have lived through), the market has always recovered and grown. We just need to remain invested through the difficult cycles.

A few interesting points regarding previous conflicts, and what the outcome in the market was specifically referring to global markets, follows below:

If history provides any indication of the future, the market will shrug this off and move on. Fundamentally we are still invested in good companies, which will remain relevant and absorb this conflict. We only need to allow some time. The nature of the stock market is to react, quite emotionally sometimes, to major events. But recovery always takes place with time.

Looking back, I think we can be assured that this too shall pass:

  • The biggest drawdown in history due to war was in conjunction with Nazi Germany’s entry into what was then the Czechoslovakian nation in 1939, and the attack on France in 1940. The S&P 500 Index fell by 20.5% and 25.8% respectively during the following 22 trading days. One year after these instances, the market was up almost 19% and 9.2% respectively, eliminating much of the drop.
  • Following the attack on Pearl Harbour on 7 December 1941, the S&P 500 Index dropped around 11% in a single day. As we all know, the US declared war on Japan the day after, and on 11 December that year, Germany declared war on the US (with the US declaring war on Germany the same day). Despite all this turmoil, the S&P 500 Index was up 15.3% one year later.
  • During the oil crisis in 1973, the S&P 500 Index fell by more than 17%. This was also followed by the slowest recovery since WWII.

War and conflict bring sudden crashes/volatility, ranging in their degrees of severity. But usually, the recovery is relatively quick.

As such, one year down the line, the market has not only recovered from the downturn, but recovered significantly to the upside as well.

Source: Seeking Alpha

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