A sound approach to your investments
Holding your nerve
We have experienced periods when global stock markets had a torrid time. Poor economic data and a dismal global outlook caused share prices to tumble, dragging indices with them. This is the toughest part of any investment journey and even the most hardened investors might panic at times like this. Knowing that equity markets can get rough as well as smooth helps to ease the panic when the storms sweep in. But the knowledge that in the long term, investments will correct themselves is comforting.
Short-term volatility in equity markets is perfectly normal. Every time the market corrects an investor’s primal instinct is to sell out ASAP. But, as history has shown, the long-term trend of the market has always been upwards. Equate this to certain physical property investments (i.e. good quality, well located properties) - the market yo-yos up and down but on average, in the long term, the trajectory continues upwards. Forty years ago you could get a plot in Cape Town’s Camps Bay for R40 000. Today that plot is worth a hundred times that. And trying to time the market almost certainly destroys even more value than panicking. Renowned US investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Investing in shares on the stock exchange has proven over time to be a long term inflation-beating investment. Investors with a longer term time horizon (7 years or more) should remain as fully invested in equities as possible at all times. Those who want to try and time the market, switching out when they think the market is close to its peak and switching back in again when it’s close to the bottom, should try a casino instead. Research has shown that this is mostly folly as almost no-one ever gets timing right consistently. If you are a long term investor, you need to invest your money and wait your time.
According to a study by market research firm, Dalbar, over the past 30 years the average investor in an equity unit trust in the US earned an average of 3.8% a year - a third of the Standard & Poor 500’s average 11.1%! This dismal performance was attributed to switching in and out of funds at the wrong time, chasing outperformance – an exercise that is often counterproductive.
Moral of the story – don’t panic when the market falls. If you sell at this point, you will bank your losses. If you sit on your hands, as the market recovers, so will your capital.
POSTED : 3 DECEMBER 2015