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Investing is a marathon: Stay the course

Graviton perspectives
| Investments, Market Forces

Current domestic economic factors such as the ongoing interest rate increases, inflation and load shedding have had a direct impact on the market. This, in turn, affects investor sentiment and can lead to investors withdrawing funds. However, it is important to note that volatility is a common feature in the market and often, ignoring short-term market news and leaving investments untouched, has proven to be the best course of action.

Research has shown that during short-term market movements, investors tend to panic and forget about the ultimate reward of a long-term investment. This article uses examples to highlight the importance of remaining invested for the longer term for achievable returns.

History repeats itself

As we take a trip down the investment and market memory lane, we look at the 2008 global financial crisis (GFC) and its impact on investor behaviour. According to the Corporate Finance Institute, “During the crisis, the housing market dropped, and evictions and foreclosures began within months. The stock market, in response, began to plummet and major businesses worldwide began to fail, leading to millions of losses. This resulted in widespread layoffs and extended periods of unemployment worldwide.” The examples below show the merits of remaining invested throughout times of market uncertainty, such as the GFC.

Investors were also in panic mode when the World Health Organisation declared the coronavirus outbreak in January 2020. Several GDP forecasts indicated an economic contraction ranging from 5% to 23.5% from a South African perspective in 2020. Russia invaded Ukraine in February 2022, which led to more panic and an estimated global total GDP loss of US$1 trillion, according to a study by the German Institute for Economic Affairs. The chart below depicts the impact of the Russia-Ukraine war on global GDP. According to Statista, “global growth is now expected to fall from 3.4% in 2022 to 2.8% this year before rebounding to 3.0% in 2024”.

Graviton Investments Statista ImageSource: International Monetary Fund, Statista, April 2023

Locally, the severe KZN floods with damage costs estimated at R7 billion (Department of Trade, Industry and Competition); and national riots accounting for an estimated loss of R50 billion and 150 000 job losses (Presidency Report), led to the discontinuation of several SMEs and triggered a fall in business and investor confidence. Overall, these adverse economic conditions have contributed to market declines but have also shown that the market always recovers, as long as there is economic growth.

A trip down the ALSI lane

Below we look at how the FTSE/JSE All Share Index (ALSI) performed against the market during the emerging market crisis in 1998 as well as the subprime mortgage crisis in 2008.

The first chart shows that investors experienced a loss between July 1998 and April 1999. However, by mid-April 1999 the market had recovered all its losses. In August 1998, the Russian government and its central bank defaulted on its debt and devalued the ruble. This caused emerging markets to experience severe downturns, with South African equities losing 32% from the end of July 1998 to the low point in September 1998.

Graviton ALSI performance over emerging market criteriaSource: Morningstar Direct and SI calculations: July 1998 to April 1999

In September 2008, world financial markets came under intense pressure due to the subprime mortgage crisis that led to the failure of large financial institutions in the United States. The ALSI reacted and experienced a severe downturn. By mid-November 2009, the ALSI had recovered from its lows as illustrated in the chart below:

Graviton ALSI performanceSource: Morningstar Direct and SI calculations: August 2008 to October 2009

These charts highlight the importance of remaining invested during market downfalls. Although human nature and emotions tend to drive decision-making during times of panic, the above examples show that to not lock in their losses and to recover from a market decline, investors should stick to their long-term investment strategies.

Therefore, remaining invested through market downfalls and not giving in to fear means that your investments will be able to recoup losses as markets recover – which they always do. Markets react severely to external events at times, but history has shown that for the most part, investors can count on a swift recovery as depicted in the charts above.

Time in the market is essential

Remember, it’s about time in the market and not timing the market. According to CNBC, “it is crucial that investors spend time in the market to benefit from the rallies, as opposed to trying to time the market and missing out on these recoveries.” Furthermore, CNBC indicated that investors who remain invested for the long-term, through market volatility and times of uncertainty, have been shown to reap better returns than those who moved their investments to cash. Staying invested gives investors the opportunity to grow their capital over the longer term and enhances their likelihood of earning solid returns.

A few key considerations:

  • Embrace volatility as it is fundamental to the world of investing and growing your investment over the longer term.
  • If you try to time the markets, you’re at risk of losing out.
  • Whether you switch from equities to cash or within equity categories, losses will be made if you choose not to stay invested.
  • Staying the course and spending time in the market enhances your likelihood of earning solid returns during volatile periods.

Stay the course.

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