Should I derisk my Investments?

If you are feeling beaten down by the market and starting to wonder if it is ever going to change. You are not alone. Especially for South Africans the last 5 years we can feel slightly left behind with global markets rallying but in South Africa low returns was the norm of the day.

After prolonged periods of low returns, we often find ourselves being tempted to ‘do something’, to make a change and to fix what’s not working. However, this can be precisely how wealth is destroyed over time.

We know equities deliver real returns to patient investors. If an investor had been exposed to the South African equity market from 1 January 1995 to 31 August 2018, they would have generated an annual return of 14.5%.

This period includes tough market conditions, including the emerging market crisis in 1998, the tech bubble of the early 2000s and the global financial crisis in 2008/09 – plus the last five years during which the local equity market has been relatively flat.

In spite of the evidence, the temptation exists to attempt to time the market – that is, to decide when to invest in the stock market and when to invest in cash. We believe that trying to time the market is a fruitless exercise. Often, the best time to invest it is when things feel most uncomfortable. If you had tried to time the market over the past 23 years and missed just the best 100 days of the total 5,782 trading days, your return would have been -2.4% per annum, instead of 14.5% per annum for the full period.

Risk of missing the best days in the market 1 January 1995 – 31 August 2018

 

The message is clear: staying the course works. Yet, despite the compelling evidence, there has been a material move by investors out of equities and into more conservative money market and fixed income products. Indeed, these asset classes provide a comfortable return profile with more predictable returns, and they have rewarded investors with positive returns over the past few years.

 

Looking forward – the bigger picture

As we are in the final month of 2018, perhaps the core message is that beaten-up assets can do surprisingly well going forward. Many forget the important role that starting valuations play when judging the ability of assets to generate above-average future returns. So, where does that leave us? In the short term, it is anyone’s guess (we’ve never claimed to have a crystal ball), although we can see some interesting opportunities presenting themselves when looking purely at valuations.

 

There’s no doubt that the current market conditions are unsettling for some. It is at these moments that we would discourage investors from making changes that could harm their ability to reach their financial goals. It is often during these difficult times that we have the greatest opportunity to add value for our clients, acting rationally when others struggle to do so.

 

Source: Morningstar

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