Market moves over the past week prompted me to dust off my Covid investment playbook and I’m happy to say that it remains as relevant now as it did in 2020 – albeit this time without a face mask.
News over the past few weeks have wreaked havoc on international and South African markets. The trade tariffs announced – and then promptly retracted – by US President Donald Trump have caused wide widespread economic instability and uncertainty, whilst local political skirmishes have been equally unsettling for investors. The current volatility can leave investors feeling like they are faced backwards on a bucking bronco.
However, at times like these, it’s good to heed the advice of investment stalwarts like Warren Buffet and remember that “the stock market is a device for transferring money from the impatient to the patient”. As a high-net-worth individual in his 94th year, Buffet has certainly weathered many a market rodeo by staying calm and focusing on what can be controlled.
Keep calm and continue investing
The best way to hang tight and stay calm in turbulent times is to focus on what we know and what we can control. This includes:
1. Past experience highlights that the seasonality of markets is to be expected.
The market has consistently risen over the longer term despite short-term setbacks. If we look back over time, we see that corrections (declines of at least 10%) occur on average about once a year. Less than 20% of all corrections turn into a bear market (declines of more than 20%). In other words, 80% of corrections are just short breaks in an otherwise intact bull market.
However, even in a bear market, which typically occurs every three to five years, a bull market will always return in time. We have the evidence of more than a 100 years to prove that.
2. It pays to stay invested during cycles
By selling out, you miss the inevitable recovery. Trying to time the market results in a sell-low-buy-high cycle. It is important to remember is that the most significant risk is not a correction or a bear market; it’s being out of the market! It’s hard enough getting the timing of one action right (when to sell), but the timing of the second action (when to buy again) is almost impossible. If you happen to get it right, it’s luck, not skill.
Using the Covid market decline as an example, markets have recovered very handsomely from their March 2020 lows, but at the time it felt very unnerving to stay invested. It is worthwhile to lean on that experience, amongst others.
The cost of trying to time the market
Source: S&P 500 Index total returns, VisualCapitalist.com
3. Investment strategies during times of market crises
So what would be prudent and rational to do during times of market crises?
Discretionary funds
Don’t sell your current investments just because the market has fallen. Instead, take stock of your holdings, sell out of inappropriate investments that have a high cost structure or don’t fit your strategy and immediately reinvest in something that better fits your strategy and lowers your costs. By going out of and into the market at the same time, the level at which you do it does not affect your long term growth, but it is an opportunity to improve the tax efficiency of your portfolio – lock in lower levels of capital gains or realise capital losses to offset future capital gains, thus reducing the capital gains tax (CGT) implications. As long as you IMMEDIATELY REINVEST.
Continue to make regular contributions and use these new funds you invest to move your portfolio to your preferred exposures. Remember, you are now buying at a discount compared to before the market decline – rand cost averaging is your friend at this time.
Retirement Savings
As with discretionary investments, don’t change the underlying investments in your retirement fund, especially if you have more than five years to retirement. Remain invested in a high-risk, high capital growth portfolio and ride the market cycle.
If you have less than five years to retirement, you can consider de-risking some of your retirement savings during this five year period, but not all of it. Only the funds you intend to withdraw at retirement should ever be de-risked – this would refer to lower risk balanced fund, or cash, the latter only when your retirement date is less than a year away. This would mean no more than one-third or your retirement savings, but perhaps even less; the balance of your retirement funds should remain in medium-to-high-risk investments.
If you plan to retire to a living annuity, you need to look past your retirement date as your investment horizon – this would be at least your life expectancy, which could easily be another 20 or 30 years, so you want to remain invested in higher risk, capital growth seeking investments for the long haul.
Regardless of your intended retirement date, you should continue to make regular contributions to save upfront personal income tax. Now would also be a good time to switch to a low-cost fund, especially if there are penalties for switching which is calculated as a percentage of the fund value.
I have money available – is this a good time to buy?
The short answer is maybe, maybe not. Nobody knows what the market will look like tomorrow, next week, or next month, and no magic bell will ring to tell you when to enter it.
It’s better to figure out your appetite for risk vs reward. Ask yourself whether your fear of losing money (if the market falls by another 10% or even 30%) is more significant than your fear of missing out on potential gains (if the market rallies from here). If your answer is yes, split your investment into two or more tranches. If your answer is no, just invest now.
Then move on, switch off the noisy news, and live your life!
Nerina Visser, CFA – ETF Strategist & Financial Advisor
