Managing Market Volatility Amid Trump’s Influence

The formidable silver steam locomotive released puffs of steam as it effortlessly pulled its luxurious coaches away from Cape Town station, making its way northeast toward Pretoria. Dark clouds, ushered in by the westerly winds, loomed over the tracks while passengers savored canapés and enjoyed their welcome cocktails. The mist significantly obscured visibility, rendering the surrounding landscape nearly invisible. As they settled into their cozy armchairs and gazed out the carriage windows, the guests found themselves unsure of their current location or immediate destination.

Nonetheless, they were well aware from their perusal of the tour brochure that this journey would be a lengthy one, characterized by numerous ascents and descents through the mountains, some unexciting stretches across the desert, and a plethora of vibrant and picturesque scenes. If they remained on the train throughout its extensive journey, they were confident that they would arrive at their destination, 1,400m higher than their departure point, feeling well-fed, relaxed, and ready for the next leg of their journey.

Investing in the markets resembles that long-distance train ride; your long-term wealth-building journey can easily become derailed if your investment strategy isn’t kept aligned. Throughout a lifetime of investing and retirement planning, challenges will invariably arise that obscure the investment landscape.

As investors, we confront fresh uncertainties daily and monthly that prompt us to contemplate a stop at the next station.

We question our investment approach, asset allocation, and stock selection. Observing the view from the train window at this juncture, a multitude of clouds currently complicates our investment decision-making process.

While blue skies are welcome, clouds are essential for rainfall …

Volatility and share prices

The global political environment is tumultuous as deglobalization gains momentum, trade tariffs overshadow free trade, Russia continues its conflict with Ukraine, and the ceasefire in the Middle East hangs precariously. Following a significant number of elections around the globe last year, power shifts have become a regular occurrence. In the US, the Republicans have edged out the Democrats, while Labour has unseated the Conservatives in the UK, and multi-party governments have become a norm.

Donald Trump’s return to office has already had profound implications for global economies and markets. His 75-plus executive orders, threats of tariffs, and leadership choices have only added to the stormy clouds enveloping the investment landscape. Would you consider investing in real estate in Greenland if it risks becoming Red, White, and Blueland?

We will always be investing in an environment rife with uncertainties. Nobody possesses a reliable crystal ball, thus we must navigate those uncertainties, recognizing and mitigating prevailing risks when feasible. It is this uncertainty that drives market activity because differing views among investors result in some buying while others sell.

Often, uncertainty can escalate to a degree that it causes market volatility—the phase when prices fluctuate dramatically, sometimes without any logical explanation. Investing in the equity market comes with a word of caution due to this potential price volatility. While this risk is inherent, it is also what draws investors in.

Price movements are necessary if you expect to see increases. In the short term, investors wishing to liquidate their holdings might find themselves faced with unfavorable price movements, but over the long run, the risk of capital losses diminishes.

Over extended periods, share prices might benefit from inflation, rising company earnings, the compounding effects of reinvested profits, along with gains from efficiencies, productivity, or innovation. However, prolonged investment horizons do not guarantee success, and a simplistic buy-and-hold approach with closed eyes is not advisable. Vigilance is always required, even with a well-diversified portfolio of premier stocks.

After fierce storms, rainbows may appear …

Market crashes

Over the years, numerous so-called Black Swan events have disrupted the investment landscape, propelling market uncertainty and volatility to extraordinary levels. Notable events such as 9/11, the 2008 Global Financial Crisis, and the Covid-19 pandemic serve as recent examples.

When uncertainties become overwhelming and investment risks rise, the path of least resistance for investors and markets often trends downward. Investors may hastily attempt to exit at any cost, and the resulting wave of negativity and panic selling drives the market lower. This is the moment when frightened investors may lock in actual capital losses while missing out on subsequent recoveries.

The bursting of the Dotcom bubble in 2000 exemplified such a market collapse. Technology stocks were riding high on promises of what the internet could offer, leading to inflated valuations. The Nasdaq Composite Index surged from 3,000 index points in November 1999 to over 5,000 points within just five months. Eventually, disillusionment with the disappointing profits of internet companies set in, causing the index to plummet below 2,600 by late 2000 and continue its descent to under 1,200 points by October 2002 (down 78% from peak to trough).

The JSE was not immune to the impact, losing 28% within four months in 2000 before rebounding by 81% to a record high in May 2002. However, it then surrendered 37% over the next year before climbing an impressive 327% over the following five years.

Attempting to predict the market within any of those shorter timeframes would have been futile, while staying the course over the long term would haveyielded notable rewards. Market crashes, though excruciating to endure, are merely blips on a long-term graph. Savvy investors often view periods of significant market downturns as prime opportunities to acquire quality companies at attractive prices.

Principles for investment

Building and enhancing wealth in the equity markets is a long-term undertaking. A simple rule might be to ‘buy the good stocks and hold on to them’ but this doesn’t encompass the entire picture.

‘Buy the good stocks’ signifies the importance of conducting thorough research and investing in quality companies with a strong track record of revenue and earnings growth and reinvesting in their advancement. This is where share prices appreciate over time and enhance your investment portfolio’s value.

‘Keep it’ alludes to exercising patience, having faith in your analysis, and retaining your selected shares for the long haul.

What this straightforward rule overlooks is the necessity for continual monitoring. As technology evolves and competition intensifies, some companies that once boasted a formidable competitive edge may find that advantage has diminished.

Great companies don’t always maintain their greatness indefinitely, and even a long-term growth portfolio may require adjustments now and then. Remember Kodak, Polaroid, Blackberry, Nokia, and Blockbuster? These once-titanic entities are now mere case studies in business education. Perhaps a more fitting mantra would be ‘buy the good stocks, keep an eye on them, and be alert for new opportunities.’

For those who relish the thrill of the markets and struggle with patience, it may be wise to maintain a core long-term investment portfolio (approximately 90%) while allocating a small portion (around 10%) to riskier, shorter-term assets. This portion can include less-researched small-cap stocks, promising yet unprofitable startups, or favored cryptocurrencies. Losses in this ‘fun’ segment wouldn’t impact your long-term growth portfolio, keeping you on track for your future years.

You won’t fail if you stay on the rails

As you embark on your investment expedition, look beyond the inevitable clouds. Relish the rhythmic clickety-clack of your dividends, ensuring they are reinvested into your portfolio rather than squandered on fleeting pleasures. And if Trump exclaims ‘Boo!’ and sends the markets into disarray, consider it an opportunity. Seek chances to acquire quality stocks at favorable prices or to better diversify and refine your long-term investment portfolio. Enjoy the ride—although bumpy, staying on track is essential.

Brought to you by Sasfin Wealth.

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