Wealth management for beginners, Part 3: The importance of staying invested and the dangers of timing the market

Wealth management for beginners, Part 3: The importance of staying invested and the dangers of trying to time the market

Cornerstone Asset Management is constantly striving to improve the way we grow and build the wealth of our valued clients. We believe that one of the biggest steps to financial freedom is education and improved understanding of how investments are put together and how growth is determined.

To help you get a better understanding of the intricate world of wealth management, we have created an all-new educational series of articles, specifically aimed at empowering our clients to be better equipped to make the best financial decisions they can.

Click here to read part 2: Time Horizons

In the final instalment of our series, we will look at the benefits of staying invested, even when markets are performing badly, the dangers associated with market timing and immature withdrawal of funds as well as how to avoid investment scams.

Why is staying invested so important?

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, we have 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 just over 15-year investment horizon from 22 October 2003 to 26 March 2019. We have also assumed that all four investors invested R1 000 000 on the 22nd of October 2003.

Source: Cornerstone Asset Management; Morningstar

What is timing the market?

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.  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.

Avoid falling for investment scams

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.

Contact Cornerstone Investment Advisory Services 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.

 

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