Publications
Partners
As the month of March is getting closer, so is the Absa Cape Epic mountain bike race.
You can rest assured that a few very tired bodies will be crossing the finish line on the 25th.
The Cape Epic comprises eight days of gruelling terrain, one mountain after the other, each of which has to be traversed on a bicycle.
With ascents totalling nearly 15 000 metres, this is equal to climbing Table Mountain twice a day over a distance of more than 100km a day.
It’s also almost equal to climbing Mount Everest twice.
According to those who have managed to complete the race, the Turkish proverb, “There is an uphill for every downhill, and a downhill for every uphill,” provides no relief whatsoever, because it’s exactly the technical nature of these downhills that causes so many cyclists to withdraw from the race each year.
As with these Epic cyclists, it’s often the “downhills” in the stock market that cause so many investors to withdraw from higher-risk investments.
Shares, however, remain one of the best-performing investments over the long term.
I won’t be discussing how to determine the next market peak, but rather the diversification of risk in your portfolio once it starts to lean towards the higher side.
Since the JSE reached a new high on 25 January, the market was down by nearly 8% at the time of writing.
Now fears are building that this may be the beginning of a long “downhill” after the impressive “uphill” we have experienced these past few years.
I was quite surprised when I started researching previous long uphill phases in the market.
Since 1960, we have had six large ones, each followed by a great correction. The average uphill lasted 85 months, and the longest 121 months.
Each of these uphill phases in the market provided investors with an average of 353% in growth (excluding dividends).
Not unlike in the Cape Epic route, each of these uphill phases, however, preceded a relatively aggressive downhill phase, each of which cost investors an average of 44% in capital losses.
Now we need to wonder if – with everyone proclaiming how high our market is trading at in terms of price earnings ratios – there is still a possibility for even further growth.
The answer, based on historical figures only, is a warning to tread very carefully. Based on historical movements (which should only be used as a guideline, and do not provide any guarantees for future movements whatsoever), our market has now entered the 107th month of its current uphill phase.
By comparing it to the average of 85 months, it means that our market is definitely experiencing one of its longer uphill phases.
Historically, we have only seen one bull run that lasted longer (March 1988 – April 1998, which ran for 121 months).
My suggestion would be to use the current market strength to restore balance to your personal portfolio by:
- Cutting back on overweight positions so that your portfolio weights fall in line with your personal risk profile; and
- Shifting your focus towards lower-priced shares in your personal portfolio, such as commodity shares, which are currently relatively low-priced.
Don’t let greed or fear determine your way forward. Both uphills and downhills will always be part of the race in any equity portfolio.
It’s how you manoeuvre through them that will ultimately determine whether you win or not.
Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 1 March edition of finweek. Buy and download the magazine here.
