Notes From my Inbox

Just as it is a good idea to regularly do mobility exercises such as yoga or pilates to enhance your physical range of motion, it is important to retain flexibility in how you manage your investment portfolio. In addition, like a good physical trainer can coach you to better results from your exercise programme, a good financial adviser can help you to make better financial trade-offs. The potential benefit of good advice is especially relevant as our DNA is set up to favour rigidity over flexibility.

Human beings are wired to crave certainty. We are prone to seek patterns and consistency and often suffer from the illusion of control, overestimating our ability to forecast the future and predict the outcome of events. While perceived certainty provides psychological comfort, it can lead to flawed decisions and missed opportunities. This is decidedly true in financial decisions, where the hidden cost of certainty is a loss of flexibility. This often arises when contractual lock-ins create path dependencies that may, in some cases, lead to long-term regret.

Retirement income planning provides a good example of the need to make a trade-off between certainty and flexibility. Retirees have two main options when funding a regular pension income.

They can optimise for certainty, by buying a guaranteed lifetime income from an insurer, but at the cost of an irreversible decision at the time of implementation. This irreversibility creates its own risk, especially in sustained periods of higher-than-expected inflation.

Alternatively, they can optimise for flexibility, by funding their income from a market-linked portfolio through a living annuity. This approach requires them to embrace more uncertainty. Within a market-linked portfolio, retirees need to choose the appropriate asset allocation. The number one rule is to own enough exposure to growth assets to ensure that they do not run out of money late in retirement.

Achieving this careful trade-off between certainty and risk in a manner appropriate for retirees is the objective of the Coronation Capital Plus Fund (early in retirement) and Coronation Balanced Defensive Fund (late in retirement).

A craving for certainty is also highly incompatible with how financial markets work. The process of price discovery that sets market prices for assets is fundamentally an exercise in discounting the future, which by definition is uncertain. One of the most important attributes of successful long-term investors is the ability to embrace this uncertainty, allowing pragmatic and rational responses to events as they unfold. If you learn to get used to uncertainty, you are more likely to achieve better outcomes over the multiple decades in the typical investor’s time horizon.

We embrace uncertainty in the way we manage your funds. By expecting the unexpected, we aim to build broadly diversified portfolios that can be resilient in the face of unexpected events. We are continuously on the lookout for change and have built the processes to respond to these in real time. This has contributed to the delivery of meaningful outperformance over long periods of time. Since its launch in 1996, the Coronation Balanced Plus Fund, our pre-retirement multi-asset fund, has used this approach to multiply every rand invested by 39 times, compared to its peer group average of 26 times.

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