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Professional advice cannot be lost to the market

11 July 2018Jonathan Faurie

The investment industry’s roller coaster ride, when it comes to returns, has seen some significant peaks and troughs when one looks at the period between 2016 and 2017.

During these years, economic growth in South Africa was very slow. And while the country was getting itself ready to get out of the mire of a constrained economic environment, another scandal involving corruption at the political turnstiles affected the country negatively. 

Despite this, there was a hidden ray of positivity in the market.    

Priced in surprises

When I spoke to any economist during the course of 2017, the conversation naturally gravitated towards the ratings downgrades that the country had to deal with at the time. 

During these uncertain times, every South African questioned the effects of these downgrades on the market. And it seemed as if every economist tried their best to assure us that the effects of these downgrades were already priced into the market. 

At a recent Allan Gray Independent Financial Adviser Roadshow (IFA) Tamryn Lamb – Head of Retail Distribution at Allan Gray – pointed out that when considering the quarterly return of the market over the past ten years, Q1 2018 was the first negative quarter in a long time. 

In fact, during the periods before the bad quarter (Q1 2018), Lamb said that the South African investment space outperformed most of its international peers on a real return basis. This was because international markets were so obsessed about pricing risk sentiments into their markets that they were not fully concentrating on looking for growth. 

Timing vs time in

In terms of strategy, a period of sustained growth can be both a good thing and a bad thing for investors. 

Obviously, growth is good for all investors. However, there are some investors who feel that the growth is temporary and that they can time the market by withdrawing their cash and by exiting the market. This is particularly done when the rand is performing well. 

“While it is true that there are often fluctuations when it comes to the performance of the rand against international currencies, trying to time the market is dangerous. Investors might pull their money out of the market just before a major dip, but this dip may not last as long as the investor expects and then they are not able to take advantage of the growth that follows a bad run,” said Lamb. 

Lamb is an outspoken advocate of adopting a strategy of time in the market. The longer an investor is invested in a market, the more growth opportunities they can take advantage of. 

Unimportant methodology

Lamb adds that spending time within a market should play an important role in the national savings psyche. We need to move beyond our obsession with timing the performance of the rand. 

“Allan Gray does not believe it is possible to time the rand. Further, it is not the most important factor that one must consider when investing internationally. One should rather focus on who you invest with and why you invest with them; what are the dynamics that are driving their profits? A regular approach brings about more consistent returns,” says Lamb. 

This is where the value of expert advice comes in. While investors may want to take advantages of positive sentiments in the market, it is the job of the adviser to keep them grounded and to manage expectations. True value is shown in times of crises, and Lamb points out that it is vitally important for advisers to outperform themselves in these situations as it is a key to success in this environment. 

The Bottom Line

At the end of the day, it is down to personal choice, and technology is creating a real drive towards consumer education. 

According to an article on investopedia.com, if volatility and investors' emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice. However, just like with a garden, a portfolio can be cultivated without compromising its passive nature. 

This is where diversification comes in, a lot of the advisers whom I have spoken to in the past have said that it is vital to have a core investment that spends a lot of time within a market. Subsidiary funds should be set aside for diversification. Therefore, if an investor wants to try and time the market with these subsidiary funds, the loss is not catastrophic as the core investment remains unscathed. 

However, while it is acknowledged that investing is personal, and every investor will embark on a different journey towards their destination, it is up to advisers and fund managers to manage the expectations of investors because they have key skills and knowledge. 

Editor’s Thoughts:
There is a lot of literature on the internet that advocates timing the market. This is a perfect example of how dangerous direct advice is. The role of the adviser should never be lost to the industry. If this is the case, there will be a lot of sad stories to be heard.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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