We know that market volatility is a certainty. While we don’t know what the price of shares will be a day or a month from now, we do know that the price will fluctuate. We also know that during periods of volatility – be it market highs or market lows – over-reacting is ill advised.
However, living out these time-tested truths is another story. As Mike Tyson quipped, “Everybody has a plan until they get punched in the mouth.”
This story chart from Pimco illustrates how investors may make poor decisions when driven by emotions, dipping in and out of the market rather than staying invested.
The Roller Coaster Investor
Markets at home and abroad have experienced significant volatility of late. As we noted recently, the JSE All Share had its second-worst day on record on 12 March, down 9.7%, only to rally and set its second-best daily performance on record of 7.5% the next trading day. Inside of this period of exceptional volatility, the JSE experienced a peak-to-trough return of -34.7%.
As the chart below shows, the JSE has already seen significant recovery in April and into May. From the low during the month of April, the All Share Index is up 33.2%.
The JSE All Share Index
Source: Cannon Asset Managers, 2020
SuperTimers, BadTimers, Procrastinators and Proactive Investors
We also all know that “it is time in the market, rather than timing the market” that matters. We’ve been told this so many times, these words can start to sound trite and overused. However, consider this example from a recent article, Is now a good time to invest?
We did a study where we looked at the track records of two theoretical investors, who each invested R1,000 to the JSE All Share Index (ALSI) every year from 1989 to 2018. The SuperTimer investor had the uncanny advantage of picking the best day of each year to invest, buying low. Contrastingly, the BadTimer investor did the exact opposite, choosing the worst day of each year to invest, buying high.
Within 30 years, the SuperTimer had grown his wealth to a handsome R906,530; while the BadTimer had accumulated a portfolio of R794,988. Whilst the figure is R112,000 less than the SuperTimer, it is still a handsome result, that suggests the difference between being “good” and “bad” in trying to “time the market” is hardly worth the effort.
Forecasting aside, we then considered two other investment strategies: the proactive investor who invests on the first day of every year, and the “procrastinator” who invests on the last day of each year. Using the same investment assumptions as the SuperTimer and BadTimer, the Proactive investor unsurprisingly outperformed his counterpart, with a result of R876,825: almost identical to the SuperTimer. While the Procrastinator, having missed out on 12 months of compounding, earned R842,285: in line with the BadTimer.
The Futility of Market Timing
Source: Cannon Asset Managers, 2019
This result shows that time spent in the market is far more important than attempting to time the market, forecast the right moment, or holding back for rainy days.
Many young investors are living through their first financial crisis. And those who remember the Great Financial Crisis in 2008 are ten years older: either now in retirement, or that much closer to it – and therefore more heavily invested in the market than before. So this time feels different.
In truth, this time is different: it always is. History may rhyme, but it does not necessarily repeat. And while market cycles are as certain as seasons, each one is as different as it is the same; as unexpected as it is predictable.
So, what can you do to ensure that you do not succumb to the investment pitfalls you know you should avoid? Review your investment plan. Familiarise yourself with the companies and asset classes you’re invested in and why. If this still aligns with your investment goals, then turn off the news and sit tight. A well-structured plan will have an investment and drawdown strategy that is built to withstand times of market turbulence. This too shall pass.