Things to remember in volatile investment times

You may have already read plenty of information about the coronavirus (CoVid-19) and its implications on humanity, share markets, countries, industries, sports and just our day-to-day lives. During these volatile times we believe it’s prudent to communicate regularly with our clients but we also don’t want to bombard you with excessive information.

Over the next few months, we will likely be publishing relevant material relating to investment principles, concepts and the potential outlook.

In this update, we cover the importance of ‘staying in the market’, ie., not exiting to a more conservative fund after the market has dropped. Market Days You Don’t Want to Miss

  • The stock market can be a wild ride sometimes.

  • Swings of 10% in value during short but volatile periods can happen and we are now seeing how the markets are reacting to the Covid-19 outbreak and decisions taken by governments, eg., China closed the Wuhan region and Trump imposed a travel ban on the European Union (26 countries).

  • Trying to time the market, ie., getting out and then back in, is an impossible task and you may end up missing out on the few days with the biggest positive changes.

​Here’s what a global fund manager (Fidelity) found when they crunched the numbers on what would happen to a hypothetical $10,000 investment into the S&P 500 index fund (USA) from 1980 to 2018 if you missed the best 5, 10, 30 or 50 days.

Key points

  • Missing the five best days when you’re otherwise fully invested drops your overall return by 35% and the results only get worse the more good market days you miss.

  • Missing the best 10 days will more than halve your long-term returns.

  • Once you miss out on the 50 best-performing days, you have completely missed the upside

​The above chart tracks a 38-year period, or roughly 10,000 days of share investing. So, if you think you can time the market, you’re betting that you can get in and out without missing the best five of those 10,000 days — which could happen at any time.

Our views

In our view the key things for investors to bear in mind are as follows:

  • During volatile times, it’s not prudent to cash in or convert growth investments to conservative investments as you will be realising paper losses to actual losses.

  • When shares fall, they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities to buy investments at cheaper prices.

  • It’s impossible to time the bottom but one way to do it is to average in over time.

  • Shares and other related assets bottom at the point of maximum bearishness, ie, just when you feel most negative towards them.

  • The best way to react in a downturn is to stick to an appropriate medium to long-term investment strategy, that should have already been in place and that is commensurate with your goals and priorities.

  • Finally, this reflects an old adage ‘Time in the market is far better than trying to time the market’

Investment Team Montage

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