It pays to stay invested in times of market volatility
Adapted from the article ‘Stay the course’ by Rafiq Taylor, Portfolio Manager at Sanlam Multi Manager
Trying to ‘time’ the market almost always sabotages long-term investment outcomes
Investors are often tempted to try to time the market in an attempt to avoid losses and maximise gains – especially in times of extreme volatility. They try to predict when the equity market is going to move up or down, and switch in and out of cash and equities accordingly. However, the overwhelming evidence is that these short-term adjustments are simply not worth the risk and can often sabotage a sound, long-term financial plan.
Not even the industry’s greatest minds can predict market movements
The long-term trend of the markets has been upward − that is, historically, stock markets have risen far more than they have fallen. Short-term volatility in equity markets is perfectly normal. However, few investors can predict with any degree of certainty when, and by how much, the markets will rise and fall. Even the industry experts get it wrong, as shown by the following statements made in the build-up to the 2008 financial crisis:
- ‘If you wait too long to buy, you will miss ’ Tobias Levkovich, Chief US Equity Strategist, Citigroup, 2007
- ‘The state of macro-economics is ’ Olivier Blanchard, Chief Economist of the International Monetary Fund, 2008
- ‘The financial system is sound and ’ Hank Paulson, Secretary of the US Treasury, September 2008
The problem with trying to time the market is that you could miss out on the biggest gains
The table below illustrates the impact of missing out on the best 10 and 20 days on the FTSE/JSE All Share Index (ALSI) over a period of almost 20 years. The table shows what your returns (excluding dividends) would have been if you’d invested R10 000 in 1995 and stayed invested, versus your returns had you attempted to time the market and missed out on the 10 and 20 days with the highest returns.
The impact of trying to time the market on investment returns
Data range: 30/06/1995 to 02/09/2014
If you missed the top 10 trading days on the ALSI in your attempt to ‘time the market’, your return would have been 49.65% less than the investor who stomached the volatility and stayed the course. If you missed the top 20 trading days, your return would have been an agonising 73.26% lower.
It pays to stay calm, stay invested and stay the course
Considering the volatility we are currently experiencing, in both local and global markets, it is more important than ever to remind your clients – and yourself – of the importance of staying invested and to avoid making costly, short-term decisions. If your clients are concerned, take the time to explain to them that if their personal circumstances and investment goals are unchanged, it is better to stay committed to their long-term investment plan. Also, reassure them that you, as their adviser, and the experienced fund managers who manage their portfolios are always keeping a close eye on the markets to ensure they do make changes when necessary while staying sufficiently diversified.