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BUSINESS NEWS AND VIDEO - As we experience volatility and uncertainty in global and local investment markets, it’s easy for investors to lose perspective, panic and ultimately make changes to a long-term investment strategy because of noise in the investment market.
We have all heard or been told that it is “time in the market” and not “timing the market” that is the most important aspect of successful long-term investing.
While we believe this implicitly, we still experience real pain of loss from our clients who have seen their portfolios drop from their high points.
However, despite the short-run pain, equities (shares) have historically proven to reward investors in the long run, but only if they can stomach the volatility.
In recent years, arguably the worst starting time for an investor would have been immediately before the Global Financial Crisis (GFC) – we’ll call this investor “the unluckiest investor” for the purposes of this article. The collapse of the sub-prime market led to a contagion effect which very nearly led to the fall of the traditional financial markets as we know them. Credit rating agencies proved unreliable, Basel II prudential guidelines proved unsuccessful, and the contagion effect proved hard to ignore.
Even if investors managed to stomach this turbulent period, the next 15 years would bring the Eurozone Crisis, Covid-19 Crisis and more recently the Russia-Ukraine war, to name a few. This begs the question, would an equity-only investor have been rewarded in the long run, despite such an unlucky start? For the purposes of illustration, we did a simple back test of a portfolio invested 50% in the JSE Top 40 Index and 50% in the MSCI World Index yields interesting results (ignoring fees and tax).
The resulting investment comparison looks as follows:
Source: Bloomberg 30 June 2022
During the GFC equity markets bottomed in February 2009, more or less when congress approved the American Recovery and Reinvestment Act, however − by that time − the unluckiest investor’s portfolio was down 30.9% cumulatively and significantly lagging cash returns.
It took the portfolio three and half years to break even, and approximately six years to overtake cash. Once out of the storm, the portfolio still wouldn’t have had smooth sailing, as it would suffer an 8.6% loss in the Q4 2018 correction and an 11.9% loss in the March 2020 Covid-19 Crash. Each of these events created an opportunity for our investor to panic and change their investment strategy.
Fast forward to June 2022, and investors again suffered losses with a downturn of 14.6% since December 2021. In the wake of the Russo-Ukrainian War, frightening inflation figures and monetary contraction, investors could have easily panicked and changed their strategy.
However, despite this, when we look at the portfolio over time, it shows that the unluckiest investor still managed an annualised return of 10.4% per annum, and cash continues to lag with an annualised return of 6.6% per annum.
VIDEO - Why choose PSG:
The example of an investor invested solely in shares is not representative of our core portfolios. For most investors, we’d recommend a diversified approach that includes a variety of asset classes appropriate to the investor’s risk profile and time frame. However, the example of the unluckiest investor confirms our belief that over time equity tends to reward investors for their patience, despite their short-term volatility. A suitable equity allocation is the cornerstone of most of our portfolios however, but the fact remains that they require time to grow. Once an appropriate asset allocation has been selected to achieve your investment goals, stick to your investment strategy and allow the various asset classes to deliver their expected long-term returns.
So, if thinking long term is difficult for you then “zoom out” and look at the long-term picture because nothing you bought 15 years ago looks expensive today!
Our office details in the Garden Route:
PSG Knysna
Unit 1, Heads View
Old Toll Road
Knysna
PSG Plettenberg Bay
7 Gibb Street
Plettenberg Bay
Kindly contact Bryn Lewis at +27 (82) 893 9112 or John Edwards at +27 (74) 622 8572 or email us for further information at bryn.lewis@psg.co.za or john.edwards@psg.co.za
The information in this document is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult your qualified financial adviser, if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.
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