Solid strategy key to staying the course and avoiding bad choices
• Many investors jump into the market when they should be getting out and vice-versa
The first quarter of the year is now behind us and it’s been a difficult year so far for investors. In fact, the first quarter has been the thirdworst quarter for investors since the global financial crisis about a decade ago. Global markets and local markets have slipped, the rand has strengthened and there has been a sharp fall in the local listed property sector.
Interestingly, these events have been against a more positive background for SA: encouraging political developments, an interest rate cut and a favourable ratings decision from Moody’s Investors Service recently.
When markets are not performing as investors had hoped for they find it difficult to stick to their investment strategy.
Financial services market research firm DALBAR conducted a study of investors in US equity funds.
In 2016, the average equity fund investor underperformed the overall market almost 5%. However, over the preceding 20 years the underperformance was almost 3% a year.
The inability of investors to remain invested over time is a big detriment to overall performance. Investors tend to buy and sell at the worst possible time as they tend to let their emotions get in the way, resulting in poor decision making.
When investment markets are performing unusually well the temptation is to invest more funds (“buy high”). When investment markets are performing poorly, the temptation is to invest less, or make withdrawals (”sell low”).
Although these actions are understandable from an emotional point of view, they are the exact opposite of what should be done. Investment markets that have had a protracted good run are more likely to fall, and investment markets that have performed poorly over a long period are more likely to rise than fall (this is based on the “reversion to the mean” statistical principle).
A more reliable way of achieving acceptable investment outcomes over time is to implement a well-thought-out investment strategy at the beginning and then stick with it over the relevant timeframe.
This is not to say the strategy should never be reviewed, as there could be unexpected events that necessitate a change. More than likely, however, the unexpected event will be a change in the investor’s personal circumstances and requirements, rather than an economic or political event that affects everyone’s strategy.
It is also important to remember that there is always activity taking place within the confines of a broader strategy.
Within a balanced fund, for example, constant rebalancing occurs between the underlying asset classes: if local shares have performed well then some of these profits will effectively be banked by selling some of the shares and investing in other asset classes such as local cash or offshore property. Changes will also be made within the individual asset classes. For example, resource shares could be swapped for retail shares as their respective valuations change over time.
Investors are more likely to stick to their strategy if they have a written investment plan based on their goals that takes into account their tolerance for risk over time.
When markets are not performing as you would expect, concentrate on what you can control. It’s not possible to control the market, but you can control your actions. Impulsive decisions are normally poor decisions that can cost you.
Try to avoid checking your account balance too often and avoid the daily flood of financial information. Work with your investment planner to set realistic goals and set rules to follow when making or altering investments. Review your investment plan at least once a year to see if changes are necessary.
INVESTORS ARE MORE LIKELY TO STICK TO THEIR INVESTMENT STRATEGY IF THEY HAVE A WRITTEN … PLAN BASED ON THEIR GOALS