Rewards for investors who ride out volatile markets

The past few years have been volatile ones for South African investors, and several recent jolts to the local and global financial systems – such as the cabinet reshuffle, Brexit, Donald Trump’s victory in the United States – have added to the uncertainty. What should investors do in times such as these?

Now, more than ever, investors need to stick to their long-term financial plans and not switch out of higher-risk investments, such as equities, into safer ones, such as cash instruments.

Investors who switch in and out of investments based on how they read the markets fare far worse, generally, than those who remain true to their investment goals. The reason is that they tend to switch at exactly the wrong times: they sell when the market is low and buy when it is high.

According to research in the US, over the 20 years from 1996 to 2015, the average investor made an average annual real (after-inflation) return of minus 0.07% (inflation over the period was 2.18%). US equities, over the 20 years, on the other hand, made a real return of 6.01% a year and bonds 3.16%. The only way the average investor could have fared so poorly was by switching asset classes at the wrong times.

A classic illustration of bad timing is how South African investors in unit trust funds reacted to the global financial crisis of 2008/9. During the first three quarters of 2008, R9 billion flowed out of equity and listed property unit trust funds, while R34bn flowed into money market funds.

From the market peak in early 2008 to its trough about a year later, the Allan Gray Balanced Fund, a multi-asset high-equity fund, lost 29.6% of its value, and an investment of R10 000 would have dropped in value to R7 039. The fund took almost two years to recover its losses. If that R10 000 investment had been left in place, it would now, about eight years later, have grown to more than R24 000. By switching out of the fund into cash soon after the crash, many investors lost out on that spectacular growth.

Research by international asset management company Vanguard into investment behaviour found that investors who deviated from their initial investment fund trailed the target fund benchmark by 1.5 percentage points.

Studies also suggest that a disciplined approach, with the guidance of a financial adviser, can add between 1% and 2% a year in net returns.

If you are nervous about your investments, the following strategies may help you to stay on track:

• Keep a sense of perspective. Downturns are not only a normal part of the market cycle, they are also normally short-lived. History shows that stock markets recover from crashes and generally reward long-term investors with superior returns.

• Ensure that your portfolio is sufficiently diversified to withstand market shocks, and that you are comfortable with the overall level of risk, bearing in mind that the longer your investment horizon, the higher the risk you can afford to take. If you are aggressively invested, you need to be comfortable with the periodic ups and downs of the market. If you are too conservatively invested, on the other hand, you might not achieve the growth you need to realise your investment goals.

It is advisable, with the help of an adviser, to rebalance your portfolio occasionally, to ensure an optimum mix of asset classes appropriate to your investment goals.

• Don’t try to time the market. It is impossible to predict consistently when good and bad days will occur. And if you miss even a few of the market’s best days, it can have a lasting negative effect on your portfolio.

• Invest regularly through the volatility. If you invest on a regular basis – for example, by buying unit trusts via a monthly debit order – the long-term performance of your portfolio will be less affected by market volatility than if you invest a lump sum on an ad hoc basis. By investing through downturns, when the prices of units drop, your monthly contribution buys more units.

• Distance yourself from your investments. Constantly monitoring and worrying about the performance of your unit trusts or shares increases the likelihood that you will experience more stress and make irrational investment decisions.

Instead of concentrating on the ups and downs of the markets, and fretting about whether you need to do something now, or about what the market will do tomorrow, it makes sense to focus on developing and maintaining a sound investment plan, under the guidance of a trusted adviser. Janet Hugo, who has the Certified Financial Planner accreditation, is a director of Sterling Private Clients, which has offices in Johannesburg and Cape Town.