History shows staying invested beats timing the market. (Manusapon Kasosod/Getty Images)
Chances are that you may be feeling stressed or anxious about your investments right now. Last week US President Donald Trump announced his plans for trade tariffs that plunged world markets into a dramatic three-day losing streak.
It is natural and okay to be feeling uncomfortable right now. Watching the value of your hard-earned investments decline in front of your eyes can be agonising. You may be struck with the urge to act. To be decisive. To make the stress and anxiety go away.
You may be thinking you should flee to the safety and relative stability of cash and bonds and then get back into the markets later when conditions are better. This is great in theory, but incredibly difficult to implement well in practice.
There is such a thing as perfect market timing: exiting and entering markets at the ideal times. However, history shows that we (humans and our machines) are terrible at predicting and identifying those ideal times.
Typically, investors exit markets at the wrong time – when prices have already fallen — and get back in at the wrong time – when prices have already recovered. When you exit an already fallen market, you lock in the loss – the loss you see on your statement becomes a real one. And if you re-enter only after markets recover, you miss the subsequent recovery. This handicaps your investment growth.
Being hesitant about when to re-enter the market may mean you eventually buy into markets at a value that is higher than before the loss that made you leave in the first place. This is disastrous.
What history shows us
My experience and reading of numerous research reports and articles on market timing, based on market data from all over the world over many market cycles, have taught me one thing: If you are invested in a well-diversified, high quality, long term focused portfolio, it is best to stay invested and to ride this out.
Every market crisis and substantial decline in history has been followed by a recovery and growth far beyond where the market was previously. It is just over five years since global markets were absolutely smashed by global shutdown due to the Covid-19 pandemic. If you were invested in a world equity index fund shortly before the crash in February 2020 and had stayed invested for a further five years, you would have earned a return of 12 percent a year in US Dollar terms over that period.
If you had fled to cash and bonds during the decline, you would have immediately locked in a loss. It is unlikely that cash and bonds would have done much better than recouping that loss you had made. You, therefore, could have been as much as 60 percent worse off than if you had just sat tight.
Exact numbers differ, but the same can be seen in any global crisis over the last 100 years or more. Recoveries follow declines, and often the best days of performance are clustered together with the worst days of loss.
What you should do
Periods of loss and wild swings in investment values (volatility) are part of your long-term investment journey. As Morgan Housel, the author of the Psychology of Money, says: “Volatility is the price of admission. The prize inside is superior long-term returns. You must pay the price to get the returns.”
If you are investing for the long term (anything from five years to multiple decades), you need to be prepared to ride this out to achieve the best performance.
Checking your investment values with great frequency is also likely to make you feel distressed. For long-term investments, I would recommend checking values no more than every quarter. Bi-annually would be better. Focus on rolling returns over periods of five years or longer – consider periods since the inception of a portfolio, if you can.
Typically, the shorter the investment period you consider, the greater the volatility. But monitoring your investment over longer periods should smooth this volatility out, showing you the kind of inflation-beating returns you should be looking for and making you feel less distressed. Remember, when you are investing it should be for years and decades, not days, weeks and months.
Step back from daily news
Seeing sensationalist headlines everywhere about recessions, bear markets and trillions of dollars lost, can make you feel bad. Take a step back from the media during times like these. You are likely to read predictions and forecasts from doomsayers that frequently prove to be wrong. Focus on what you can control, rather than what you can’t.
You may also see recommendations that you should move to alternative assets, such as gold or cryptocurrencies or some other supposedly safe product at times like these. Remember your long-term strategy. It should have been formulated with much thought by you and your advisor to suit your individual needs. Abandoning it at the first sign of trouble isn’t the right way to go. You need to stick to the plan.
Staying invested and riding this out is a choice. If you consider history, it is often the best choice. This is why I am going to be staying invested.
A further choice is to keep contributing to your investment. If you do so regularly, for example, a fixed amount monthly, you will be able to purchase more shares or units at times like these. You will be buying in the dip and getting more bang for your buck. This is called rand-cost averaging. So remember that investing is more about spending time in markets than it is about timing markets.
Please reach out to your financial advisor if you are feeling worried, anxious or stressed. We are here to help you navigate difficult times like these.
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).
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