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Within the first 10 days of 2016 it was already safe to say that the year started with a bang.
After parting with the US dollar at a whopping R15.46 in 2015, who would have thought that only 11 days later, the rand would be trading above R16.80/$?
And with the FTSE/All Share Index already trading 6% lower at the time of writing this article, we last saw a New Year take off this badly in 1995.
At this point, however, I would like to thank SABMiller for its ongoing contribution to the index, as we certainly would have traded much closer to January 1995’s 13.85% drop without this company waiting for its payment in pounds.
Although this massive drop in world markets isn’t exactly unexpected, the biggest question that investors are struggling with is, “What do we do now?”
When you get onto an aeroplane, you are always presented with a step-by-step demonstration and manual prior to take-off on what to do in case of a flight emergency.
Unfortunately, there is no such step-by-step manual available to assist investors in case of a stock market ‘emergency’.
The solution, in short, is that if you still have 10 plus years before you retire, the best thing to do would be nothing.
The local market was negative 17% of the time over any two-year rolling period over the past 50 years, and although most experts insist that you should at least have a five-year investment horizon when it comes to shares, the local stock market was negative nearly 4% of the time over any five-year period in the same 50-year span.
Had you extended your investment horizon to 10 years, however, you wouldn’t have experienced any negative periods over the past 50 years in the local stock market (including dividends).
If you have to retire within the next 10 years, things become more complicated and you will have to take more variables (such as cash flow, etc.) into account.
By taking a sober look at a market correction, you will realise that it isn’t necessarily such a bad thing.
On the contrary, when it comes to the stock market for the past few years, I’ve been feeling like a shopper walking into a shop where every item is marked 20% higher than the normal asking price. My advice to investors is as follows:
1. Keep your emotions out of your investments
I know this easier said than done, but when stock markets experience massive declines, fear is an emotion that often prompts us to sell investments just as they actually start to show value for money.
If you don’t have any urgent financial obligations such as retirement, try not to let your emotions get the better of you. Shares still remain the asset class that shows the best growth over the long term.
2. Corrections present opportunities
Over the past 50 years, the local stock market has declined by 10% in any rolling three-month period 11.5% of the time (69 times).
This tells us that a correction isn’t an abnormality, and also that it will happen many more times in the future.
What I find interesting about these declines, is that every time that the market dropped by 10% or more over a rolling three-month period, the average rise in the index only 12 months later, amounted to 15% over the past 50 years.
Although there were also many negative 12-month earnings following these declines, it shows us that, firstly, corrections present us with some investment opportunities and secondly, that corrections in many cases can be short lived.
The fact that 2016 may not be a particularly easy one for investors certainly isn’t what I planned on structuring my first piece of writing around this year.
Regardless of this, however, I don’t believe that it will be impossible to identify and seize good investment opportunities this year.
This article originally appeared in the 21 January 2016 edition of finweek. Buy and download the magazine here.
