You’ll reap the re­wards if you ride out the eq­uity mar­ket’s troughs

Weekend Argus (Saturday Edition) - - FRONT PAGE - LAURA DU PREEZ

If you con­sider the long-term per­for­mance of the dif­fer­ent as­set classes, you will find that eq­ui­ties out-per­form the oth­ers. But there is no telling what eq­ui­ties could do to­mor­row, over the next week, or the next month, Paul Hutchinson, the sales man­ager at In­vestec As­set Man­age­ment, says.

Hutchinson says in­vestors in eq­ui­ties might find it use­ful to med­i­tate on an anal­ogy used by Ralph Wanger, the found­ing part­ner of Chicago’s Wanger As­set Man­age­ment, about watch­ing a woman walk a Golden Re­triever in a park.

While the woman walked at a steady pace through the park, the dog romped around the grounds. Try­ing to guess where the dog would run next was dif­fi­cult, but the dog came to the park with its owner and left with its owner. You know where the dog started and where the dog ended up, although the dog’s move­ments were un­pre­dictable dur­ing the 30 min­utes it spent in the park.

Like the dog’s move­ments, short-term mar­ket move­ments are un­pre­dictable. This makes for ex­cit­ing read­ing in the me­dia, but you need to re­mem­ber that eq­ui­ties out-per­form other as­set classes over time – to con­tinue the anal­ogy, the dog will leave the park with its owner, Hutchinson says.

He says that if your eq­uity in­vest­ment falls by more than, say, 10 per­cent, you may feel anx­ious and want to flee to the per­ceived safety of cash. How­ever, as dif­fi­cult as it is, the best thing may be to do noth­ing.

Con­sider an in­vestor ex­posed to the MSCI All Coun­tries World In­dex, which lost 51 per­cent from Oc­to­ber 2007 to the bot­tom of the global fi­nan­cial cri­sis in Fe­bru­ary 2009. If the in­vestor had in­vested US$100 000 in 2007 sold out of the in­dex at the bot­tom of the mar­ket and only re-in­vested a year later, he would have US$88 351 to­day, whereas if the in­vestor had re­mained in­vested, he would have US$139 385, or 58 per­cent more, to­day.

US re­search com­pany Dal­bar has been mea­sur­ing the ef­fects of in­vestor de­ci­sions to buy, sell and switch into and out of mu­tual funds (US unit trusts or col­lec­tive in­vest­ment schemes) over short- and long-term pe­ri­ods since 1994.

Dal­bar’s re­search shows that, on av­er­age, in­vestors earn less – in many cases, much less – than the fund in which they in­vest. This is be­cause of self-de­struc­tive be­hav­iour: in­vestors sell when a fund’s per­for­mance bot­toms and buy when its per­for­mance peaks, Hutchinson says.

“No mat­ter what the state of the mu­tual fund in­dus­try, boom or bust, in­vest­ment re­sults are more de­pen­dent on in­vestor be­hav­iour than on fund per­for­mance. Mu­tual fund in­vestors who hold on to their in­vest­ments have been more suc­cess­ful than those who try to time the mar­ket,” Dal­bar says.

Hutchinson says although there is more noise and me­dia com­men­tary about mar­ket in­sta­bil­ity, in­vestors should not panic. In­stead, they should recom­mit to their long-term in­vest­ment goals and re­mem­ber that they are most likely to achieve them with time in the mar­ket, as op­posed to try­ing to time the mar­ket, he says.

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