Remain true to your investment plan in tough times

Shaun Ruiters, Executive of Business Development at PPS Investments.

While it might be hard to remain calm during market turbulence, if your customised investment plan is in play it is advisable to stick to the plan, regardless of market cycles. Even if you are feeling uncomfortable about the political or macroeconomic climate, it is best to consult a financial adviser before taking a knee-jerk reaction to short-term market fluctuations or volatility.

The reason why it is so important to stay on track with your investment plan is because switching to a less risky investment option in a state of panic about market volatility may be the reason that you fail to meet your investment goals. Most investment plans have appropriate risk mitigating buffers to ensure that your investments are appropriately cushioned during the bumpy rides.

To illustrate this point, let’s look at a simple example of two investors – Panicked Pete and Stable Susan – and how their two different approaches affected their investment performance over the long term.

Panicked Pete and Stable Susan consulted with their respective financial advisors and both investors were advised to invest in equity for their longer term goals. Both investors commenced their investment in 2003 with R100. Over the period of the financial crisis in 2007-2008, Stable Susan remained in close contact with her financial advisor and given the long-term nature of her goal, she maintained her position in her investment and stuck to her financial plan. Panicked Pete, however, decided to switch his investment from equities to cash at the start of 2009 without consulting his advisor. Unfortunately, because of this knee jerk reaction, his total return to June 2016 was less than half of that of Stable Susan’s return.

This result was purely due to the fact that Stable Susan remained committed to her financial plan, while checking in with her financial advisor during in turbulent times. In doing so, her investment grew to R1 053 relative to the R100 she initially invested. Panicked Pete also grew his investment from R100 to R498, but the opportunity cost of his knee-jerk emotional decision to switch from his financial plan of equity for his long term investment to cash, cost him R554, which is an opportunity cost in excess of 100%.

Source: MorningStar

As you can see from the graph above, the importance of simply sticking to your investment plan during trying times and also consulting your expert financial advisor remain key to surviving the impact of market volatility when investing.