With more red than green days this month and year, the Local Equity market is proving to be a very scary place both for existing investors and for those looking to enter into this new world. It comes with promises of the highest returns in history. Just take a look at the numbers below:
- 15.44% per annum had you been invested in the last 20 years
- 12.82% per annum had you been invested in the last 10 years
- 5.94% per annum had you been invested in the last 5 years
- -8.37% per annum had you been invested in the last year
What these numbers do show us, is that the longer you remain invested the better the likelihood of achieving those higher double digit returns. It also shows us that the current returns have been poor in comparison to those of before and that is what causes all the concern, anxiety, frustration and quite frankly it makes us scared. This is not a post about market returns but rather on why and then when to get into the local equity market:
- Understand why you are getting into Local equity Markets. If you understand the reason for investing your money into this asset class, it will make things a lot easier once you are already invested and start seeing all of the horrible red bars.
The reason for investing should be driven by a need for investment return. NOT the need for the highest investment return possible, but by a specific predetermined need for an Investment return. If your lifestyle financial plan says you need an Investment return of X and your financial adviser then recommends the local equity market after hopefully modeling your lifeplan around an average return of NOT 44% and possible 9% over a 10 year period, well than you understand why you are getting into the market. - Understand your Investment time horizon As we can see from the opening statements the longer you remain invested in the markets the higher the probability of achieving your required investment return objective. We can see from the below graph that history tells us that if we had been invested over the last 10 years, we would have experienced more green days and years than red ones.
When discussing your required investment return object, this needs to go hand in hand with the investment period, equities should be viewed with a 7 to 10 year time horizon, in order to deliver the goods. Once you understand you time horizon STICK TO IT. Things will get bumpy, hairy and scary, and you will want to pull your money out, BUT DON’T, you have to remain invested and stick to your plan. You are there for a reason, remember the reason and stay invested. - Don’t try to time the market Entering the market at all time lows makes for great conversation and may make you feel like a hero, but what if the market drops next week, then that becomes the new all time low and then you’re not a hero. What you have done by trying to time your entry into the market is brought a whole lot of emotions to the table and emotions are the last thing you want when investing your money. Research from Investment Solutions, based on I-Net Bridge data, shows that a R100 investment on the JSE would have grown to R1 760 over the two decades between 1995 and 2014. If you’d missed the 10 best days, your investment would be worth almost half that R965. Miss the 60 best days and your investment would be worth a tiny R143.
There is a chessy industry saying that goes like this ” It’s not about timing the market, but about the time in the market”.
- Work with a team of Professionals When entrusting your hard earned money to the industry, you want to make sure that you have the right people doing the job for you, so do your homework. Make sure you select a manager who has a sound investment process, one that resonates with you, one that makes sense to you and one that you believe will be able to deliver the goods. If you are comfortable with their investment process and their ability to react to different market conditions, then you should be comfortable that will be able to deliver your predetermined investment return.
Lastly, once you have selected the right team, then sit back and let them do their job, don’t question them daily, weekly, monthly or even quarterly, remember YOU chose the manager, YOU agreed on your investment horizon, YOU agreed on the reason why you are investing, so let them do what they need to do.
So, if you’re looking at getting into the market, whether it’s local equity, offshore equity, listed property, bonds or even cash, remember it’s always a good idea to follow a process. One that will help you identify your investment need (if any), by identifying the lifestyle you want to live. Put the time and effort into you planning and you will reap the benefits of being able to live the life you want with the money you have available, before it’s too late.