The Key to Success: Long-term Investments with an Emphasis on Russian Assets
The military special operation, draconian Western sanctions, and record-breaking inflation are just some of the factors driving Russia’s stock market into a state of agitation. What is the best way to manage savings in difficult times, and where is best to invest in order to minimize risks? Capital Ideas spoke about this with Vitaly Isakov, Director for Investments at Otkritie Asset Management Ltd. (“Open Investments”).
What are the main mistakes made by participants in the stock market?
A mistake can be made when forming a portfolio – for example, when an investor buys shares, but he may need money in a year. This is a mistake, since there is a risk of losing on a possible decline in stock prices. If the investor buys shares with the right target, with an investment period of 3, 5 or more years, then it is a different matter. Let’s say the quotes have fallen, but you will not need money for 3, 5 or 10 years. So you can safely sit out this period of uncertainty, waiting until the quotes recover – provided that the country maintains a functioning market economy, which we believe in.
Does the proverb “you shouldn’t put all your eggs in one basket” become particularly relevant in the current situation?
This principle never loses relevance. It’s about asset diversification, stocks and bonds. “Bonds” in a broad sense includes other conservative instruments, such as bank deposits, balances on demand accounts. In addition, Russian investors pay attention to real estate. Diversification by country and currency is more complicated. For example, Russian investors who bought foreign shares faced risks this year: their assets were frozen. No one could have predicted such a situation in advance.
What factors are most important for a competent determination of your own risk profile?
The first is that the basis of the portfolio should always be a financial safety cushion. We are talking about savings that is invested as conservatively as possible: exactly the bank deposit or demand account in the amount of several months of your family’s expenses. A typical mistake – a person began to save, invested all his savings in shares, and then an unforeseen life situation happened: the cost of car repairs or medicine. The investor is forced to finance these unforeseen expenses by selling shares.
Secondly, the prevailing opinion that you can earn a lot of money in the stock market is erroneous. If you have a low salary and you save, say, only 1000 rubles a month, then even excellent results of the financial markets will not help you in any way. So you should not wait for miracles, but focus on your income and your demand in the labor market.
What investments seem to be the most justified now: short-term, medium-term, long-term?
The situation in the country is uncertain and psychologically difficult for many; some even leave. We cannot advise anything specific in terms of investment. But there are those who believe that the difficulties can be overcome, that the economy and businesses will function. For optimists, now is the time to make long-term investments. At a time when prices in the market are set by alarmists, the opportunities for this are simply magnificent. The quotations of securities bought now at bargain prices, may increase significantly in a few years – when companies restore their financial results, and the panic and tensions subside. Therefore, for those who remain in Russia and associate their future with it, it is simply necessary to estimate their own needs, then firstly form a financial safety cushion, and secondly, determine their goals – medium-term, long-term – and distribute the available funds with an emphasis on Russian assets.
What is important for successful portfolio formation? What is best to invest in: bonds, stocks, gold, precious metals …
I would distribute portfolios among these listed assets, and the proportions depend on the individual situation. If you take the average individual, then after the formation of a safety cushion, they can invest 60% in bonds; if there is an appetite for gold, then 5 percent can be invested in it. We give gold less weight in the portfolio, since this asset has no cash flows. With stocks and bonds, we have the opportunity to count dividends. If we talk about the choice of individual securities, then non-professional investors can be advised to utilize the services of investment funds. This would eliminate the need to monitor the market, reinvest incoming payments, etc.
Taking into account the latest currency regulation measures in Russia, does it make sense for potential investors to get involved with the dollar and the euro? Wouldn’t it be better to look at, say, the yuan?
The dollar and the euro, indeed, have become risky investments – and the point here is not Russia’s measures for currency regulation, but the measures that unfriendly countries can take. After all, it is they who impose restrictions and freeze assets. Relatively speaking, with one stroke of the pen, the United States can make it so that you will not be able to use your dollars located in a brokerage account for an indefinite period.
There are alternatives. You can buy some instrument traded on the Moscow Exchange, and such instruments denominated in dollars or euros already exist. In extreme cases, these instruments will be paid to you at the ruble exchange rate. You can store these currencies in bank deposits and then, as a last resort, you will be returned these funds in rubles at the exchange rate. There is always the option to buy cash currency. A separate question is what to do with it; it should be stored either at home, where you are at risk of banal robbery, or in a bank safe deposit box that needs to be paid for.
If we talk about alternative currencies, then, indeed, this is one of the options for savings – first of all the yuan, for liquidity reasons. In Russia, the habit of saving in foreign currency was formed during the years of the weakening of the ruble; in the new reality, it cannot be said that we are waiting for its weakening. Therefore, other things being equal, I would recommend that people retrain themselves, and reduce the share of currency in their savings.