2017’s big investment lessons

NOBODY SAW IT COMING: FROM THE DOLDRUMS, FTSE/JSE ALSI ENDED YEAR 21% UP

Many investors tend to chase performance by investing in last year’s top-performing funds, but returns vary from one year to the next.

By the start of 2017, many local investors had given up on the JSE. Not only had the market been through two-and-a-half years of very weak performance, but political uncertainty and the poor state of the local economy led many to believe they were better off holding cash.

Come June, a market rally saw the FTSE/JSE All Share Index (Alsi) end the year 21% higher than where it started.

Fund

Coronation Resources Fund Investec Value Fund R Argon BCI Worldwide Flexible Fund A Old Mutual Mining & Resources Fund R RECM Equity Fund B Investec Commodity Fund R Nedgroup Investments Mining & Resources Fund R Momentum Resources Fund A SIM Resources Fund Flagship IP Flexible Value Fund A1 FTSE/JSE All Share Index Source: Morningstar

There are two key lessons for investors in this. The first is how difficult it is to time the market.

There was little, if anything, to suggest the JSE would perform the way it did from mid-June to end December. No market commentators were suggesting this was the time to pile into SA stocks.

The gains were so strong that

despite 2015’s and 2016’s poor returns, the Alsi delivered a threeyear annualised return of 9.3% to the end of 2017. That’s still below its longer-term average, but 4% above inflation, and much better than anyone would have seen in a portfolio of only bonds or cash over that period.

This highlights how important it is to remain invested if you’re looking to meet long-term goals.

The second lesson is how difficult it is to predict which asset class will outperform from one year to the next. No one expected local equity to be the best place to have your money in 2017; the performance of asset classes is variable from one year to the next.

It’s no use trying to predict how an asset class will perform, based on its returns from the previous year. Even within an asset class, there is huge variability. Even JSE sectors don’t perform in a regular pattern from one year to the next. In 2016, the Top 40 underperformed all the other major indices. Last year, it was the top performer.

Many investors tend to chase performance by investing in last year’s top-performing funds, but what happened in 2017 shows clearly how returns vary from one year to the next.

The table shows the top 10 funds from 2016 and how they subsequently performed in 2017:

For anyone who’s investing just because the previous year was so good, 2017 would have unquestionably seen them taking all their money out again and putting it elsewhere.

They would have effectively bought high and sold low, locking in that loss, severely damaging their long-term investment performance.