The importance of staying invested, even when the market is down
Over the last few years, it would be an understatement to say that the South African economy has been volatile and completely unbalanced. This reasons for this are widespread, but political changes and instability both locally and abroad played a large part. The local markets (as measured by the FTSE/JSE all share index) have been flat and volatile over the past 4 years which has left many investors very concerned about their investment performances and even more anxious about what the future holds.
As an investor, it’s easy to get caught up in the whirlwind of fear which might lead to unwise investment decisions like disinvesting or parking your investments in money market or cash type instruments with the intention of investing when markets recover. At Cornerstone Asset Management, we believe in a strategic, disciplined and client centric approach to investing and that is why we will always put your needs and the health of your investments above all else.
With that approach in mind, we would always advise that when markets are down, and growth seems weak, you should be weary of making rash decisions without looking at the bigger picture and not considering past performance and future market predictions.
Hold onto your chips when the market dips
The first and most common action taken by worried investors who see market values dropping, is to cash out their investments and invest it elsewhere – usually in a “safer”, lower risk option. However, the cost implications (admin fees, penalties etc) and possible tax liabilities of cashing out can lead to a massive loss in capital. Furthermore, by the time you see growth in your new investment, the market may have already stabilised, and you would have taken a huge hit for no reason.
That is why it’s vital that you stay invested, even when the market is down. Historically, the market has always recovered and shown long term growth, therefore a disciplined and stable approach to investing will almost always serve you well.
To illustrate this point clearer, Cornerstone Asset Management has done an analysis using the JSE All Share Index to show the difference in return between an investor who decided to stay invested and three other investors who have missed 10 best days, 20 best days and 50 best days of being invested in the market. Our analysis has considered a 15-year investment horizon from 23 October 2003 to 22 October 2018. We have also assumed that all four investors invested R1 000 000 on the 23rd of October 2003.
Source: Cornerstone Asset Management; Morningstar
The graph above shows that the investor who remained fully invested in the market would have grown their investment to R5.4 million over the 15 years, and the investor who have just missed the best 10 days (green line), by trying to time the markets, would have lagged the fully invested client by R2.3 million. The blue line shows the result for the investor who has missed 20 of the best days in the market. They have lagged the fully invested client by approximately R3.3 million, while the investor who has missed the best 50 days (red line) of market returns would have lost approximately R125 000 of their initial capital.
We have also calculated the annualised return differentials between the four investors as presented in the below graph. Our analysis shows that the fully invested investor would have outperformed the investor who missed the best 10 days of the market by 4.2% per annum over a 15-year period. The graph also shows that the investor who has missed the best 50 days of the market would have under performed the fully invested investor by 13% per annum. In fact, this investor would have had a negative growth of 0.9% per annum over the past 15 years.
Don’t try and time the market
You have cash to invest, but when should you invest it? Should you invest when the markets are doing great or wait until they are down? Perhaps you could find a pattern in the market and use it to get the best returns at the lowest cost?
This game of trying to spot the perfect moment to invest is called ‘timing the market’ – a dangerous and mostly ineffective practice that can hurt you more than you think.
We understand that volatile and flat markets increase the risk that investors, out of concern, sell and then re-buy at the wrong times. As much as it would seem “easy” or “simple” to buy when prices are low and sell when they are high, it is very difficult or even impossible to correctly predict the best time to invest.
Don’t make the mistake of trying to tame an untameable beast – markets are notoriously unpredictable. The best way to decrease loss and increase growth of your investments is with a properly structured, diversified portfolio that has been compiled by a qualified and experienced asset manager or investment specialist. This portfolio should be reviewed often and adjusted to improve its performance using academically sound and realistic market predictions.
Don’t let emotions cloud your judgement
In times like these, it’s so easy for our judgement to be clouded by fear and uncertainty that we might be misled into believing unrealistic and untrue growth promises by con artists and criminals. A good rule of thumb is that if an offer seems too good to be true, it usually isn’t, and you will end up losing a lot of money. Don’t fall for pyramid schemes, Ponzi schemes or any form of illegal or fraudulent “investments” that claim massive returns within a short period of time.
It might seem silly and obvious to you to avoid these scams, but it’s surprising what desperation and fear can do to people. If you are approached by someone who claims great returns, always check if they are a qualified, licenced and a registered financial services provider, that practices in accordance with the Financial Advisory and Intermediary Services Act (FAIS).
Remember, a wise investor knows that the market always fluctuates and that’s why he or she plans and monitors market movements to adjust portfolios to accommodate these inevitable fluctuations. Don’t let fear, worry and panic allow you to make bad decisions that can cause you to lose thousands of Rands.
Chat to us today and let our investment specialists smooth out the road for you and help you to avoid dangerous potholes and errors. Please feel free to share this article with friends, family and colleagues and remember to find and follow us on Facebook and LinkedIn for more interesting and relevant content like this.