Investing in turbulent times!

This month our newsletter is a little earlier than usual. This is because we are living in difficult economic times and world stock markets are volatile at the moment. I thought it might be a good idea to address the issue of investing in turbulent times! It is at times such as these that investor behaviour becomes erratic and investors make decisions based on emotions rather than good business sense.

 Investor behaviour has been the same throughout history! Investors buy shares/unit trusts when the stock market increases (i.e. when shares/unit trusts become more expensive) and sell shares/unit trusts when share prices decrease (i.e. when shares/unit trusts become cheaper). This makes no sense at all and is irrational behaviour! Guess what? Investors are doing it again!

Nobody knows for certain what will happen in the short term. Share prices will go up and come down. However, we have much greater clarity about what will happen in the long term. Investments in shares/unit trusts have been and will continue to be a key component of wealth creation. Whilst there is much turmoil and bad news, such scenarios often present opportunities for patient and sensible investors. After market corrections it pays to stay invested, as subsequent returns are often very good. It is therefore important to stick to your strategy and not be distracted by emotion.

Investors cannot do anything about the current volatility in the markets. So it is important that investors focus on what they can control!

Focus on what you can control!

 Educate yourself. Be sure that you understand the facts.

Assess your objectives for investing, and consider whether these objectives were realistic to begin with.

Assess the risk you need to accept to achieve your goals (and whether you can tolerate this risk.)The longer the investment horizon, the greater the reduction in risk

Be careful of trying to time the market! Investors who have tried to time the markets by switching into cash have generally not been successful.

A comprehensive study done by the University of Michigan over an 80-year period showed that investors consistently earn lower rates of return by switching between funds at the wrong time (up to 5% p.a. less.)

Being out of the market is risky. For the 10 years to 11 August 2011, the Johannesburg Stock Exchange All Share Index provided a return of 366%. The return for investors who missed the best 10 days in the market had a return of less than half of that!

Do not try and pick a fund manager based on how they performed over a short period one or two years) as this could lead to mistakes. How managers perform in bear markets has a significant impact on their future performance. If a fund manager does not appear to be performing too well over one year it is probably because he trying to protect investors from making losses!

If you can see the band wagon, you have already missed it!

Over longer periods of time, cash may actually be a more risky asset class (in terms of the probability of achieving objectives) than equities.

Don’t let your emotions influence your long term investment decisions. I you are in any doubt about your long term goals, strategy or risk tolerance contact Kevin Mills on 041 3730601.