Don’t be spooked by short-term mar­ket moves

Finweek English Edition - - INVEST DIY - BY SI­MON BROWN

hu­man be­ings we’re not very good at man­ag­ing or un­der­stand­ing risk, this is be­cause our pri­mal in­stinct is fight or f light. We want to ei­ther hit it or flee from it, but our re­sponse to risk needs to be much more nu­anced. One ex­am­ple of the way we man­age risk badly is that many of us buy the stock mar­ket at the top and sell it at the bot­tom for the sim­ple rea­son that it feels right. Buy­ing at highs seems right be­cause things are go­ing up and ev­ery­body is ex­cited, while s el l i ng at t he bot t om s e e ms r i ght be­cause things are col­laps­ing and peo­ple are gloomy. Yet we know that the in­verse is the right course of ac­tion – buy at the lows when ev­ery­body else is fear­ful.

Our mis­man­age­ment of risk was fur­ther driven home for me last week when I had a meet­ing with a 28-year-old who re­vealed that her en­tire in­vest­ment port­fo­lio (and a chunky one of around R100 000) is in­vested in money-mar­ket funds. When I asked her why, she said the stock mar­ket was dan­ger­ous and friends of hers had lost money. Both state­ments are cor­rect, but she missed the main point of in­vest­ing: time. At 28 years old, she has al­most 40 years un­til re­tire­ment and in that time the stock mar­ket will crash at least four times, maybe more. But even with those four crashes her in­vest­ment will show sig­nif­i­cant growth, beat­ing in­fla­tion and other as­set class re­turns, re­sult­ing in real wealth cre­ation.

We’re overly fear­ful of mar­ket crashes and/or cor­rec­tions. Yet they’re fairly com­mon. Data from the S& P 500 shows that a 10% cor­rec­tion hap­pens on av­er­age ev­ery year, a 20% cor­rec­tion ev­ery three to five years while a 30% to 40% cor­rec­tion (crash?) hap­pens about once a decade. The mon­ster 50% cor­rec­tion has only hap­pened twice in the last 100 years.

So not only are they fairly com­mon, but the mar­ket still of­fers inf la­tion­beat­ing re­turns over time in spite of these mar­ket cor­rec­tions.

I still clearly re­mem­ber my first share pur­chase on the JSE, it was Oc­to­ber of my ma­tric year and I bought a few hun­dred rand of DiData. The prob­lem was that the year was 1987 and a week later we had a real mar­ket crash as the Dow Jones shed over 22% in one day, now ca l l ed Black Mon­day.

At the t i me it f r ea ked me out, but my grand­fa­ther, who’d been teach­ing me about stock mar­kets, laughed, point­ing out this was go­ing to be the first of many crashes I would ex­pe­ri­ence and I should get used to it.


AP­PLIES TO THE SHORT TERM – OVER THE LONG TERM THEY ARE THE BEST WAY TO CRE­ATE WEALTH. He was right. I have since wit­nessed the 1998 cri­sis, the dot-com bust and most re­cently the 2008/09 global f inan­cial cri­sis. That makes four in just un­der 30 years.

More i mpor­tantly, i f i nstead of DiData I had bought the in­dex – we didn’t have ex­change-traded f unds (ETFs) back then and the in­dex would have been the All Share – I would have paid un­der 2 000 points and to­day it is al­most 50 000. This mas­sive wealth cre­ation ex­cludes div­i­dends that would have sig­nif­i­cantly in­creased my re­turns.

So, sure, mar­kets are dan­ger­ous, but in re­al­ity that only ap­plies to the short term – over the long term they are the best way to cre­ate wealth. If we have time on our side, we should use that time by in­vest­ing in the mar­ket (in­vest sim­ply us­ing ETFs) and cre­ate real wealth for our­selves. The short­term moves will be noisy and scary, but ig­nore them, fo­cus­ing in­stead on the long-term wealth cre­ation as­pect of the mar­ket.

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