STAY INVESTED AND MAINTAIN A LONG-TERM VIEW
The global political and economic landscape has been in a state of flux recently. Global inflation, rising interest rates, Russia’s invasion of Ukraine and China experiencing economic uncertainty are all factors contributing to a complex environment for investors. The financial markets have also been impulsive over the past couple of months and we have seen major movers up as well as down. Years ago, JP Morgan was asked, what will the stock market do, he answered “It will fluctuate”.
The past couple of months has borne this out. We have seen the investment industry overreact to economic, corporate and political news, but this is not all bad news, however, as volatility also has the potential to create opportunity.
It is a basic human disposition to be focused on the short term. We are quick to forget that markets have had a phenomenal run over the past decade and volatility is bound to occur. The fact remains that the overarching tendency for stock markets has been upward over the past 100 years. When investors “stick to their guns” and maintain their convictions and sound investment principles, we believe it will always deliver in the long term.
In our fast-paced world, quick access to information allows us to be in touch with current world events and to view how decisions made by politicians and regulators influence our markets. The impact that active traders exert on share prices can be enormous when they react to information instantaneously. These short-term reactions cause investors to doubt the market, opting to get out after they witnessed a downturn, and wanting to return after upswings have begun.
Are these short-term reactions a key to great investment returns? Or is a long-term investment strategy based on long-term fundamentals the key to unlocking these returns?
If we observe market movements over the last two decades we find some clarity on this:
R100 fully Invested in the JSE All Share Index (ALSI) from June 1995 to the present would have provided an average return of 16% per annum. When missing the 10 best-performing days in this period, your own investment returns are reduced to only 12.4% per annum. This decline is more rapid as missing more and more of the best performing days in the period are lost, leaving you with a mere 1.9% return if the best 60 days over the same period.
The short-term investment decision is called market timing, and involves two decisions “When do I buy?” and “When do I Sell?”. There is no guarantee that your buy decision is occurring at the bottom of the market and neither is there a guarantee of selling at the top, as markets tend to move higher in the long run. Nobel laureate Harry Markowitz, known as the father of modern portfolio theory, has been quoted as saying: “It is yet to be shown that anybody has the capability to market time successfully, and it is certainly yet to be shown that billions of dollars of pension funds could be successfully market-timed.”
Long-term investing provides the most consistent returns, and having a trusted partner to assist you on this path makes the journey even safer. As prudent investment managers, we at Warwick Wealth believe in quality, in depth-analysis and diversification. When investment decisions are made by solid reasoning, backed by logical conclusions, investments are expected to deliver in the long run. Buying quality quite simply means looking for investment opportunities with sensible and experienced management, good future potential and financial strength which creates long-term attractive value. This same logic must be applied when considering share selections, geographical diversification and sector allocations.
Long-term investing means being patient and allowing time for your investment principles and philosophies to pay off.