Turning down the noise and staying invested

Study after study has revealed that successful long-term investing requires tuning out bad news and staying invested for the long haul.

The reason for this, explains Rodney Msimango, Head of Business Development at Old Mutual Corporate Consultants, is that markets experience cycles of good and poor performance, and it’s necessary to be invested through these cycles to avoid timing the market and to achieve optimal returns.

The optimal length of time to be invested will depend on what you are investing or saving for. “Shorter-term needs may require portfolios that deliver returns over a shorter period and will necessitate lower risk investment which don’t experience extreme cycles, whereas longer-term needs, such as retirement, have a longer investment period and can thus have a greater exposure to growth assets which have better expected returns but can also experience ‘lumpy’ returns,” he says.

The key things investors must consider, he adds, is their investment objective, the investment horizon and the combination of asset classes that are best suited to deliver those outcomes.

In the “information age” of immediate access to news, financial information and market opinions, it can be difficult to stay the course in the face of negative news.

“The reality is that we are predisposed bad news than to to react positive more news,” quickly he to says. “Negative market events generally lead to twice as much ‘pain’ from a 5% of loss than the ‘pleasure’ of a 5% gain. Thus over the short term, ignorance is bliss when reviewing investment returns.”

“Bad news”, he explains, creates more opportunities for investors to stray from a long-term plan such as saving for retirement. He advises guarding against this by reviewing returns and portfolio balances on a less frequent basis. This has two benefits:

first, it allows more time for positive returns to manifest, and it reduces the potential for knee-jerk reactions and decisions.

“Considering the return profile of the South African equity market, the longer you are invested the more likely you are to have a positive return,” says Msimango. “Shorter investment periods expose one to a higher chance of experiencing low or negative returns while over longer periods we see a significant decrease in the probability of negative returns.”

The idea of staying the course holds true even during periods of poor returns, says Jerry Mahlangu, Retail Investment Specialist at Old Mutual Corporate. “Time in the market trumps timing the market. While the past three years have delivered generally poor returns, there have been a number of periods when exposure to individual asset classes have delivered good returns,” he points out.

A focused and disciplined investment strategy removes the emotional aspect from investing, elaborates Msimango, and confirms why investment decisions must be based on empirical evidence.

A recent study conducted by Old Mutual Corporate Consultants, using returns of the South African equity market since 1925, shows that if investors check returns monthly it can expose them to up to a 36% chance of seeing a negative return, he says. Over longer periods there is a significant decrease in the probability of negative returns. “The likelihood of positive results increases as the holding period increases. In fact, over periods exceeding 10 years, the probability of a negative return is almost eliminated.”

However, this positive outcome can only be achieved by staying the course, remaining focused, disciplined and refusing to make knee-jerk reactions, he insists. “Although this is easier said than done, it can be achieved through financial education and an understanding of your needs and objectives,” says Msimango.

“For younger people, particularly, retirement may seem like an issue they only need to address years down the line, by which time it’s too late to make any significant change. Retirement fund members need to be educated on the perils of procrastination through empirical evidence and scenario analysis,” he argues.

There are two very particular phases in retirement: the pre-retirement phase and the post retirement phase. Traditionally, retirement funds were required to cater for the former by providing cover for death, disability and retirement fund saving. Recent legislative developments now require retirement funds to have a view of a preferred post-retirement annuity strategy and provider, in addition to traditional coverage.

“The new legislation requires that retirement funds are not only catering to the needs of their members up to the end of their working lives, but also during retirement,” explains Msimango. “This requires a long term view on how their money is invested.”

And while some investors are taking advantage of cost-effective digital platforms to construct their own portfolios, this practice should only be used when you are certain that you have the necessary financial tools, expertise and time to do this properly. “This is a tempting option given the need to decrease fees in the investment industry. However, getting appropriate financial advice from a professional advisor provides peace of mind that your future financial security is assured,” he advises.

Time in the market trumps timing the market” Jerry Mahlangu Retail Investment Specialist at Old Mutual Corporate T he longer you are invested the more likely you are to have a positive return Rodney Msimango Head of Business Development at Old Mutual Corporate Consultants