2016 has been one hell of a wild ride, alright! At the beginning of the year, market “experts” must have been thinking the world was ending. Now order has somewhat been restored (FYI there’s never order in the markets as there is always a reason why you should sell and leave), leaving long-term investors feeling vindicated for their resilience and patience with equity markets rebounding, taking out bearish speculators along with the trash.
When it comes to investing, time is like a double-edged sword. Spending time in the market allows us to ride out volatile periods, thus giving us an opportunity to share in the intense recoveries that follow market corrections. More money has been lost trying to time the next big crash than when the actual crash happens! Lesson: don’t be smart because these markets will humble you. The more you keep your investing simple, the greater the chances of enjoying superior returns.
A Simple investment strategy is acknowledging what you don’t know and focusing on what you can control. Things that are within your control in the investment process – asset allocation decision, costs associated with investing, your investment horizon, and your emotions.
Since the beginning of 2014, the following, inter alia, factors have negatively influenced the South African market;
- Geopolitical events such as Nene Gate, Zupta Gate, Brexit etc.
- The prime interest rate has increasing from 8.5% to 10.5%.
- Local politics and the aftermath of local municipal elections.
- A weaker rand as compared to the US dollar at the beginning of 2014.
- Increase in the inflation rate from 5.4% in 2014 and steadily approaching the 6% mark in 2016.
- Stock market valuations have considerably higher P/E ratios.
Although this is not an exhaustive list, the highlighted factors leave little to be desired. (like I said, there’s always a good reason not to be invested but stay invested anyways)
However, despite all of this, the market is up more than 12% since the lows we saw on the 21st of January 2016.
Research on the JSE ALSI Top40 Total Return Index (TRI) starting from June 2002, illustrates how spending time in the market can work to your favour when it comes to investing. Going back to June 2002, If an investor had entered the market and stayed invested for a period of three years and longer, the worst cumulative* return over any three year period was 0.76%.
The best cumulative return over any three-year period was 207%! It gets better, over a five-year period the worst cumulative return was 33% and the best return being 370%. It’s Wild!
*A cumulative return is the aggregate amount that an investment has gained or lost over time, independent of the period of the time period.
The picture is not as rosy for the short-term traders. Over a period of one month the worst return was -13% with the best return sitting at 14%. Over a year the worst return was -38% and the best return being 73%.
What this shows is that over the long term (a period of three years and longer) an investor would not have lost money in nominal terms if they were invested in the South African equity market at any point between 2002 and 2016. This includes the disastrous market correction of 2008.
Over a 100 year horizon, the stock market has been on a consistent upward surge, of course there have been hick-ups along the way.
The reason for this consistent growth lies in the fact that shares remain an amazing investment vehicle for financial growth over the long-term. Shares carry a higher risk for the investor, but over the long term, shares remain one of the best asset classes for growth.
The important fact is that investors should remain invested in times of uncertainty and volatility.
Investors who try to time the market will fail more often than they are likely to succeed. Unless you happen to own a crystal ball and you believe in unicorns. This often leads to buying high and selling low. The recovery of the market often happens quickly after a correction, thus if an investor decides to exit the market when times are bleak, he may find it difficult to get back in at the correct time.
However, it is easier said than done to stay calm when it seems the world is going up in flames, and staying the course of the investment journey.
In order to deal with times of market folly, proper financial advice is paramount in ensuring that you minimise investment risk via an adequate asset allocation strategy and not by timing the market or acting on daily news feeds. And most importantly, please get a hobby!
“It is said an Eastern Monarch once charged his wise men to invent him a sentence, to be ever in view, and which should be true and appropriate in all times and situations. They presented him the words: ‘And this, too, shall pass’. How much it expresses! How chastening in the hour of pride-how consoling in the depths of affliction! ‘And this, too, shall pass’. And yet let us hope it is not quite true.”-Abraham Lincoln.