SUR­VIV­ING MAR­KET TUR­MOIL

Maya Fisher-French looks into whether you should be hiding in cash

CityPress - - Business -

Over the past week, in­vestors have been on a Pres­i­dent Ja­cob Zuma-fu­elled roller coaster ride as mar­ket val­u­a­tions and cur­ren­cies re­acted to the po­lit­i­cal and eco­nomic fall­out of the Cabi­net reshuf­fle. What ev­ery­one is try­ing to fig­ure out is what this means for the mar­kets, but this will be hard to do.

While we have some idea of the di­rec­tion our cur­rency and mar­kets (bank­ing stocks in par­tic­u­lar) will take based on dif­fer­ent sce­nar­ios, no one knows what those out­comes will be.

It is not sur­pris­ing that fi­nan­cial ad­vis­ers have been in­un­dated with queries from clients about switch­ing into cash. In all this un­cer­tainty, it may be tempt­ing just to opt for cash and wait for the chaos to sub­side, but is that a good long-term de­ci­sion?

This week, in­vest­ment house Glacier by San­lam held a pre­sen­ta­tion for its clients and ad­vis­ers about how to man­age these tur­bu­lent times.

What it con­cluded was that while no one could be cer­tain about what mar­kets would do in future, or what re­turns would be like for equities and bonds, what we can be sure of is that volatil­ity is here to stay and the mar­kets will re­main volatile.

So, should you take an antin­au­sea tablet and stay in­vested – hang­ing on dur­ing the ups and downs – or should you rather play it safe, switch to cash and have a bet­ter night’s sleep?

If you are tempted by the lat­ter, Glacier rec­om­mends that you first con­sider the fact that cash di­min­ishes an in­vestor’s pur­chas­ing power af­ter taxes and in­fla­tion be­cause it is not par­tic­u­larly tax ef­fi­cient, and in­ter­est rates do not suf­fi­ciently pro­vide for real in­fla­tion.

If, based on the above, you ac­cept that you can­not sit on cash for­ever, you ef­fec­tively need to de­cide to time the mar­ket.

This means mov­ing in and out of in­vest­ments based on your mar­ket re­turn pre­dic­tions. Not only do you have to make the cor­rect de­ci­sion about when to switch into cash, but you also need to make the right de­ci­sion about when to go back into the mar­kets. The prob­lem is that we are no­to­ri­ously bad at get­ting this pre­dic­tion cor­rect. Even if you get out of the mar­ket at the right time, you will most likely miss the mar­ket re­cov­ery. Glacier by San­lam did some re­search on mar­ket tim­ing based on R100 000 in­vested over 20 years. If you left the money in­vested through all the mar­ket ups and downs, in­clud­ing the mar­ket crashes of 1998, 2003 and 2008/09, your money would be worth R1.4 mil­lion to­day. If you had tried to time the mar­ket and missed just five of the best-per­form­ing days in that 20-year pe­riod, your to­tal re­turn falls to a lit­tle more than R1 mil­lion. If you missed the 10 top-per­form­ing days out of the 7 300 days, your re­turn halves to R774 000.

So, ask your­self this: When you switch out to cash, how do you know you won’t miss some of those cru­cial mar­ket re­cov­ery days where the bulk of the re­turns will be made?

As Glacier con­cluded in its pre­sen­ta­tion, a crys­tal ball would be a won­der­ful thing – the prob­lem is that it is im­pos­si­ble to con­sis­tently pre­dict when those good or bad days will hap­pen and, even if you miss just a few of those days, it will af­fect your over­all re­turn.

WHY EQUITIES ARE RE­ALLY KING

In the past 15 years, there was only one year where cash beat both equities and bonds – 2015. Is that likely to be re­peated again soon?

Over the same time pe­riod, equities out­per­formed both cash and bonds on 10 oc­ca­sions, and bonds have out­per­formed equities and cash on five oc­ca­sions.

Over­all, how­ever, a pure eq­uity in­vest­ment would still have de­liv­ered the best av­er­age re­turn of 19.92%, com­pared with 10.32% for bonds and 8.12% for cash.

If you are a long-term in­vestor but ner­vous of ex­treme volatil­ity, opt for a bal­anced fund that in­vests in both equities and bonds rather than try­ing to time the mar­ket.

The equities will give you the po­ten­tial for a higher re­turn, while the bonds will lower the fund volatil­ity and still out­per­form cash and, there­fore, in­fla­tion.

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