You are Here > Home > My Investments > Surviving market turmoil

Surviving market turmoil

Apr 17, 2017

market volatilityIn recent weeks, investors have been on a President Zuma-fuelled rollercoaster ride as market valuations and currencies reacted to the political and economic fallout of the Cabinet reshuffle.

Everyone is trying to figure out what this means for the markets, but this is not easy to do. While we have some idea of the direction our currency and markets (banking stocks in particular) will take based on different scenarios, no one knows what those outcomes will be.

It’s not surprising that financial advisers have been inundated with queries from clients about switching into cash. In all this uncertainty, it may be tempting just to opt for cash and wait for the chaos to subside, but is that a good long-term decision?

Last week, investment house Glacier by Sanlam held a presentation for its clients and advisers about how to manage these turbulent times. It concluded that, while no one could be certain about what markets would do in future, or what returns would be like for equities and bonds, we can be sure that volatility is here to stay and the markets will remain volatile.

So, should you take an antinausea tablet and stay invested – hanging on during the ups and downs – or should you rather play it safe, switch to cash and have a better night’s sleep?

If you are tempted by the latter, Glacier recommends that you first consider the fact that cash diminishes an investor’s purchasing power after taxes and inflation because it is not particularly tax efficient, and interest rates do not sufficiently provide for real inflation.

If, based on the above, you accept that you cannot sit on cash forever, you effectively need to decide to time the market.

This means moving in and out of investments based on your market return predictions. Not only do you have to make the correct decision about when to switch into cash, but you also need to make the right decision about when to go back into the markets.

Too difficult to time the market

The problem is that we are notoriously bad at getting this prediction correct. Even if you get out of the market at the right time, you will most likely miss the market recovery.

Glacier by Sanlam did some research on market timing based on R100 000 invested over 20 years. If you left the money invested through all the market ups and downs, including the market crashes of 1998, 2003 and 2008/9, your money would be worth R1.4 million today.

If you had tried to time the market and missed just five of the best-performing days in that 20-year period, your total return falls to a little more than R1 million.

If you missed the 10 top-performing days out of the 7 300 days, your return halves to R774 000.

So, ask yourself this: when you switch out to cash, how do you know you won’t miss some of those crucial market recovery days where the bulk of the returns will be made?

As Glacier concluded in its presentation, a crystal ball would be a wonderful thing – the problem is that it is impossible to consistently predict when those good or bad days will happen and, even if you miss just a few of those days, it will affect your overall return.

Why equities are really king

In the past 15 years, there was only one year where cash beat both equities and bonds – 2015. Is that likely to be repeated again soon?

Over the same time period, equities outperformed both cash and bonds on 10 occasions, and bonds have outperformed equities and cash on five occasions.

Overall, however, a pure equity investment would still have delivered the best average return of 19.92%, compared with 10.32% for bonds and 8.12% for cash.

If you are a long-term investor but nervous of extreme volatility, opt for a balanced fund that invests in both equities and bonds rather than trying to time the market.

The equities will give you the potential for a higher return, while the bonds will lower the fund volatility and still outperform cash and, therefore, inflation.

This article first appeared in City Press.


Maya Fisher-French author of Money Questions Answered

Previous Articles

Listen: Global investing made easy

In this podcast Maya (@mayaonmoney) speaks to Warren Ingram (@warreningram), financial planner at Galileo Capital about his new book Global Investing Made Easy. Warren shares his insights into the investment decisions we make, and those we should be making.

SARS issues guidance on crypto assets

On 27 August 2021, SARS provided further guidance on the correct tax treatment of crypto assets and how this must be declared in people’s tax returns. SARS published a document on its website entitled Crypto Assets & Tax. The publication should perhaps best be...

High-risk land investment leaves angry investors out of pocket

Many South African investors who bought UK property developments through SA-based property marketing company SJ Capital, have seen no returns for over 11 years. Investigations have found that the investment is extremely high risk and that investors were not fully...

Listen: Creating a passive income with shares

In this podcast, Maya (@mayaonmoney) chats to money blogger Brett (@ETFenthusiast) on how blogging helps keep him on track financially, his plans in working towards financial freedom, and which investments he is using to provide a passive income in the future.

You don’t need a lot of money to start investing

Many people feel they need to have a lot of money in order to start investing. In fact, the opposite is true. Investing small amounts every month actually provides the best risk-return scenario when it comes to longer-term investing. Investing via a monthly debit...

Retirement planning is not a once-off event

Jaco Prinsloo, Wealth Manager at PPS Wealth Advisory, has some sensible advice around retirement planning. As a wealth manager, I have observed that there are two typical clients. Some dread retirement, while others look forward to it. Those who dread it are the ones...

Four signs that could predict a market crash

Pieter Hundersmarck, fund manager at Flagship Asset Management, wants us to learn from history when it comes to the factors that could trigger a market crash. While the future is unlikely to be an exact repeat of the past, history is full of valuable lessons. These...

Removing the rand from the offshore investment equation

Kyle Wales, fund manager at Flagship Asset Management, says that we should consider offshore investment for the right reasons, not simply because we fear rand weakness. Many investors base their decisions to invest offshore purely on their subjective assessment of the...

Habits that set successful investors apart

When investing, sometimes the best course of action is to do nothing. Having the ability to block out the noise, and look through the cycle, are some of the cornerstones to investment success over the long term. Nomi Bodlani, head of strategic markets at Allan Gray,...

Listen: Why institutions are taking bitcoin seriously

If you want to understand bitcoin, blockchain and the related crypto-asset world, listen as Chris Becker, blockchain technologies specialist at Investec Private Bank, unpacks the world of blockchain technologies and explains why we are just at the start of a...

Pin It on Pinterest

Share This