Do nothing now that the bear has arrived
Given the sharp losses experienced by investors this year — the past two months in particular — there are two obvious questions that come to mind: why are markets falling, and what to do in response.
On a year-to-date basis, the MSCI world index is down 5.8% and the FTSE/JSE Swix index 15.8%, while the rand has depreciated from R11.70 to the dollar to about R14.50.
On the “why” front, the answer is a complex conflation of factors. The sell-off has been largely driven by concern about global growth — and particularly the slowdown in China, likely to be worsened by the US trade tariffs, and the US, which may well have peaked. Corporate earnings forecasts of many listed US companies have been cut due to increasing wage bills and interest rate costs.
Europe is looking messy. There is the uncertainty of Brexit, Italy challenging the budgetary limits of the eurozone and both Poland and Hungary straining the cords that bind the EU together. The US’s reimposition of sanctions on Iran and the implosion of Venezuela have seen the oil price rise to more than $80 a barrel, affecting global inflation.
Withdrawal of monetary stimulus is also playing a major role. The US Federal Reserve has increased interest rates three times this year and is shrinking its balance sheet. The European Central Bank plans to end its bond buying by year end, and even the Bank of Japan is cutting back on quantitative easing. The new era of “quantitative tightening” is here.
Emerging markets have been the main victims of the sell-off, reeling as equity markets fall, bond yields spike and currencies depreciate. So how should we react? The first thing to recognise is that the past decade has been extraordinary. Since January 2009, the FTSE/JSE Swix index is up a cumulative 224% and the MSCI world index 292% in rand terms. That is something to celebrate, even if it is history.
History also teaches us a valuable lesson: every bull market is followed by a bear market. The bear market is here.
On a positive note, since the 1930s, bear markets have been much shorter than bull markets, lasting on average only 18 months. The average time it has taken for an equity portfolio to both endure a bear market and fully recover its value has been just more than three years.
Hence the best way to react is to do nothing. You do not know how long the bear market will last, but you do know that a bull market will follow. Resist the temptation to time this by exiting now and hoping to time the re-entry just prior to a recovery. It is a fool’s errand.
Second, remind yourself of your investment timelines. If you do not plan to retire in the next decade, there is no point in worrying about short-term volatility. Even if you are at a retirement stage and have not derisked your strategy, provided you remain invested in the markets and don’t sell, the value of your savings will recover in time. Third, if you are using a trustworthy asset management firm, it should already be making conservative investment decisions for you.
If you feel the need to reassess things, look at the only thing you can control: the fees you pay. Over time, high management fees erode much more value than any short-term market fluctuations. This is particularly true in a period of single-digit or negative returns. You may also want to review how much of your savings is invested domestically versus internationally, particularly when it comes to savings outside your retirement fund.
If you switch, switch geographical exposure.
For most people who do not have savings outside their retirement fund, the best advice is to do absolutely nothing. If you are invested in an appropriate long-term strategy, conservative or growthoriented, stay the course.