For long-term investors, avoiding a bear market is a little like the shopper who stays away from the grocery store because prices are down.
Periods of low returns, as we are seeing now, always cause concern. But the biggest risk when markets do sell off is that people tend to panic. They either don’t invest at all, or they move their savings to a less risky product. This is the thing that really destroys value for long-term investors such as retirement savers.
There has been quite a lot of volatility in markets this year, and we are in a protracted period of ‘anaemic’ returns.
If you go back three to five years, returns have generally been below expected long-term returns. It’s soft, it’s flat.
At times like this, it is more important than ever to remember the golden rule of investing – it’s not about timing the market, but simply time in the market.
If you are saving in a high equity portfolio, you have a certain expectation of long-term returns, but we know there will be periods when markets are strong, and periods when markets are weak.
The long-term expected return of 10X’s high equity portfolio is inflation plus 6.5%, but returns are lumpy. Over the last 10 years we have had five-year returns ranging from as high as inflation plus 14% to as low as inflation plus 3%.
When you are in a period of low returns you can look forward to periods of higher returns.
Go back to 2009, and you had one-year returns of inflation minus 25% – but within 12 months the market had fully recovered with one-year returns of inflation plus 25%.
People who panicked and moved their savings to cash and bonds locked in their losses and didn’t make that money back.
If you don’t have an immediate need for your savings it’s better to stay invested in the market. Markets tend to mean-revert, and that can happen quickly.
And to those long-term savers who are adopting a wait-and-see approach, this is not a great time to freeze your savings programme.
The way to think about it is that your R2 000 a month, or R5 000 or whatever it is you are putting into your retirement policy, will buy you more units in a high equity fund when the price is low. Think of it as a discount of sorts.
When prices drop at your local grocery store, you don’t say I am going to buy less. When prices are high, you don’t say I am going to buy more. But unfortunately that is what people do when investing.
If you have more than five years remaining before you need to access your savings, you have enough time to ride out the short-term volatility.
When an investor’s portfolio value is growing because markets are strong, they tend to feel a lot more confident. You are more bullish and feel that you can bear the risk. You are feeling rich, you are feeling confident, so you buy. It can be an emotional rollercoaster, but you have to go through the downturns to enjoy the upside.
We don’t get CPI plus 6.5% in a straight line. We get periods of below average return, but those periods of below average return have always been followed by periods of above average return.
Chris Eddy is 10X Investment’s senior investment analyst.
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