Investors have endured a rollercoaster ride over the last few years, with an even higher level of turmoil, volatility and some negative returns during 2018.
This can be very unsettling for investors but it is essential to resist the urge to panic and do something rash to try to ease the pain. For a long term investor who is invested in a growth-orientated, well-diversified balanced portfolio, managed by a reputable asset manager, the best course of action is to sit tight and ride out the volatility.
What’s the issue?
It’s important not to focus unduly on the short term performance of investments, but it is difficult to avoid the news flow about stock market losses, share blow-ups like Steinhoff and inevitable Rand gyrations.
The chart below shows how much of a bumpy ride it has been over the last 22 months, Each line shows how much R100 would have grown to in each of the main asset. The grey shaded area shows the level of inflation over this period
During times like these it may be difficult to stick to your long term investment plan and you may be tempted to switch to another investment or move to cash. Below are a few tips to help keep you on track.
Focus on the long term
Stocks go up and down but in the long term they do gradually climb upwards, despite the risks and unforeseen events that crop up on a regular basis.
The chart below shows how the stock market has climbed the “wall of worry” over the past few decades. It also highlights just some of the crises that have attempted to derail this upward journey, without success.
You can’t time the markets
You’ve heard it before and it’s true. It really is very difficult to predict what will happen to investments and prices in future. Trying to time the market is therefore not a good idea. Bear in mind that not only do you need to predict when to switch out of the stock market, for example, but also when to switch back in as you cannot remain on the sidelines forever or you will miss out on share market growth. There are lots of ways to try to time the market and some of them might even be successful once or twice, but getting it right consistently is extremely hard to do and requires a lot of good luck.
Drawdowns (negative returns) are an expected part of a long-term investment strategy
Although it can be uncomfortable, drawdowns are perfectly normal behaviour for a long-term strategy. Therefore there is no reason to panic when a long-term growth strategy experiences some negative returns in the short term. Learning to ignore this makes a good long-term investor. If it helps, don’t look at your statements or values too regularly as it may make you more worried.
Cash might seem safe, but it’s the riskiest investment when it comes to long term retirement savings
Cash is often seen as the least risky investment. It is the least volatile and it can protect you from negative returns in the short term. However, volatility isn’t the most important risk when it comes to retirement savings. A more important risk is inflation risk, which is the inability to outperform inflation. In this sense, cash is in fact more risky as it doesn’t generate the level of inflation-beating returns (of the order of 5 or 6% above inflation) required to achieve a real growth on your investment.
South Africans tend to beat themselves up but much of this is due to global factors
South Africa has scored a few own goals that act as a handbrake on our economy and prevent us from reaching our potential and creating wealth for all our citizens. Yet many of the risks causing the significant uncertainty, volatility and weakness in markets are global factors.
The current market certainly isn’t for the faint-hearted. Yet successful investors are those who are able to remain calm during times of stress such as we are experiencing at the moment. By remaining focused on a long term strategy, investors give themselves the best possible chance to earn the inflation-beating returns that convert regular monthly contributions into a sound retirement or long term savings outcome.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)