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Surviving the markets in volatile times

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(iStock)
(iStock)

Cape Town - The recent volatility in global markets has got many investors fretting over how to safeguard their hard earned savings.

While it’s easy to follow the mantra of keeping emotion out of your investment decisions when market conditions are benign, it’s quite another matter when a sudden selloff sees your life savings being rapidly eroded. The JSE All-Share Index lost some 11.4% from its all-time high in April, sinking from more than 55 000 index points to just under 48 000 points.

To put that in monetary terms, if you had R1m invested in the equity market, that would equate to losing R114 000 in just 4 ½ months. It takes true strength of character to hold course and not resort to a sudden retreat out of equities in such a scenario.

Carl Roothman, chief executive of Retail Business at Sanlam Investment, says one of the worst things investor can do in the face of a sudden equity market correction is panic.

“Equities are instrumental when investing for growth, however investors need to be in it for the long haul and sit tight through volatile times,” he says. “When markets suddenly fall and alarmed investors start to call, the toughest part of your client journey starts: assuring investors that choppy waters too can lead to the right destination.”

Roothman says that the first rule of thumb investors should consider is that equities are quite simply not for those with short-term investment horizons, such as individuals seeking quick market windfalls to fund future liabilities such their children’s university education.

“Equities are therefore absolutely not for clients wanting to invest for periods shorter than three years,” he says. “The risk of losing money in real terms is simply too high.”

As a case in point he refers to the market selloff sparked by the global financial crisis which began taking a significant toll on the local bourse in September 2008. As world financial markets came under pressure the JSE All-Share Index lost about a third of its value by the end of that year and only recovered from its lows by mid-November 2009.

“Investors in the equity market for the year from September 2008 to September 2009 would therefore not even have regained their capital, let alone kept up with inflation,” says Roothman.

Time in the market is thus an essential part of any equity-based investment strategy. This is precisely why old hands often live by the adage that “time in the market beats timing the market”.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves,” according to world renowned investor Peter Lynch, who achieved a 29.2% average annual return as manager of Fidelity Investments Magellan Fund between 1997 and 1990.

This advice is corroborated by a study done by market research firm Dalbar, which showed that over the past 30 years the typical US investor in an equity unit trust earned an average of 3.8% a year, or just one third of the Standard & Poor’s 500’s 11.1% average annual return over that period. This was largely attributed to investors’ habit of switching in and out of funds at the wrong time.

Roothman says that to truly benefit from the equity market’s proven long-term inflation-beating potential, investors need to have a long-term horizon, preferably of 10-years or more, and stay as fully invested in the equity market at all times during that time.  

“Trying to time the market is just not worth the risk,” says Roothman. “If you are going to try and time the market by switching out when you think the market is close to its peak and with the aim of switching back in again when it’s close to the bottom, you might as well head to the casino.”

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