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Stay the course

| Market Forces, Personal Finance

Given the recent volatility on the JSE due to the Coronavirus pandemic, it may be very tempting for you, as an investor, to pull out of equities and switch to cash. The last few weeks have been tough for investors. After a day of steep declines, markets recover for a short while, only to have them decline again.

When it comes to your investments, you should, however, avoid reacting to falling prices by exiting the market. In fact, selling out of the markets in a panic when they fall, will prevent you from participating in subsequent higher returns when markets eventually recover. In attempting to time the market, investors try to predict when the equity market is going to move up or down, and switch between equity and other asset classes accordingly.  We caution you against this. Time has shown that investors are better off not reacting to short-term market movements, and sticking to their long-term plan.

History has proven that an attempt to time the market could result in missing an opportunity to participate in the best bounce-backs. Although the fundamental detail and reasons behind the current situation are largely different from market crashes previously endured, we’ve used these market crashes as examples below to highlight the impact of exiting the market when it experiences a serious decline.

When Russia defaulted on its debt obligations in August 1998, emerging markets all experienced severe downturns, with South African equities losing 32% from the end of July 1998 to the low point in September 1998. The chart below shows that investors would have experienced a grand loss of 32% over the above-mentioned period, but by mid-April 1999 the market had recovered all its losses as demonstrated in the chart below:


Source : Morningstar Direct and SI calculations: July 1998 to April 1999

In September 2008, world financial markets came under severe pressure due to the subprime crisis which led to the failure of massive 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 can be seen in the following chart:

Source: Morningstar Direct and SI calculations: August 2008 to October 2009

Although human nature and emotions tend to get the best of us in times of tribulation, the above examples demonstrate that in order to not lock in losses and actually recover from a market decline, investors should really stick to their long-term investment goals. Remaining invested through market weakness and not giving in to fear, means that your investments will be able to recoup losses as markets come back. Markets react severely to exogenous events at times, but history has shown that for the most part, investors can count on a rather swift recovery.

When money markets outperform equity markets, investors fear market failure and choose to switch to cash as they believe this is the best investment strategy. However, switching from equities to cash during periods of high volatility or poor performance, will mean that you miss out on the upturns when markets adjust.

Source: Morningstar Direct March 2020

Source: Morningstar Direct March 2020

Any decision to exit the market also involves a decision of when to get back in. Many investors tend to wait too long and end up missing the rebound. Remember, no one knows exactly when prices will hit rock-bottom, and no one can accurately predict when prices will rise again. Markets don’t go up all the time. Corrections of 10 percent or more are common and is a normal pattern in stock market behaviour. There are, however, instances when values can fall 20 percent or more. Fortunately, bull markets tend to last longer than bear markets.

We would like to leave you with a few key thoughts over the next few weeks:

  • Embrace volatility, as it is fundamental to the world of investing
  • 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 invested gives you capital protection over the long term
  • Staying the course and spending time in the market enhances your likelihood of earning solid returns during volatile periods

All the best for the coming period.

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