Investors with staying power rewarded for rocky six-year ride

If you had braved the 2008 market turmoil triggered by the global credit crunch as well as the extreme volatility of 2011 sparked by the Euro zone crisis and held on to your investments, you would have ended 2013 feeling handsomely rewarded for your investment prowess.

Peter Dempsey, deputy CEO of the Association for Savings and Investment South Africa (ASISA), says while the stock market took investors on an extreme roller coaster ride over the past six years, it would prove to be a rewarding one for those who believed in their investment strategies, closed their eyes and held on.

He says a R100 000 investment made six years ago at the beginning of 2008 in the South African General Equity collective investment scheme category would have been worth R174 445 at the end of December 2013. This represents an annualised return of 9.7% a year for the six-year period. This period includes the substantial market correction that took place in the latter part of 2008.

Dempsey says even the more risk averse investors who sat out the storm in a South African Multi Asset Low Equity portfolio would not have been disappointed. A R100 000 investment in this category would have benefited from an annualised return of 8.8% a year and grown to R165 897 over the six years ended December 2013.

Investors who have seen their investments grow over the past six years may now be tempted to lock in their gains and retreat to cash given that prophets of doom are currently dominating market commentary. And investors who have been waiting on the sidelines waiting for the right moment may feel despondent worrying that their time may never come.

Should you consider market commentary when taking investment decisions? Dempsey responds with a quote dating back to 1894 from Mark Twain’s novel, Pudd’n Head Wilson: “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February”.

In short, says Dempsey, it is impossible to time the markets and what you do next should be determined by a solid long-term financial plan drawn up by a trusted adviser. Such a plan, he adds, should be expertly managed to adapt as you move through your various life stages of:

  • Creation and protection. Usually in your 20s and 30s when you start investing and taking out risk cover such as life and disability insurance.
  • Building and protecting. In your 40s when you grow your investments and assets, as well as protecting yourself and your family against calamities such as death, disability and dread disease.
  • Utilisation and preservation. Once you have retired and you need to ensure that your retirement savings will fund your lifestyle until you die.

“Therefore, if your financial plan requires exposure to the growth potential of equity markets, then you need to accept that equity investments are for the long-term and that markets will move up and down over the lifetime of your investment.”

“The opportunity cost of trying to time the market by switching between asset classes is huge over the longer term, because you will lose out on market surges.”

Avoid taking emotional decisions when investing, advises Dempsey. “Buying and selling decisions driven by greed and fear will ultimately result in loss.”

He points out that the best antidote to risk is time. “If you have time on your side you will be able to sit out the volatile times and watch your investments grow when the stock markets are running strong.”

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