Succeeding In Volatile Markets In 2012
As South African investors look to take stock of their financial situation in a year characterised by turbulent economic conditions and high levels of stock market volatility, many will be left with more questions than answers as to their investment approach in 2012. This uncertainty is being fuelled by conflicting economic data both locally and abroad, lingering fears over a double dip recession and the ongoing European sovereign debt crisis.
According to Henry van Deventer, Financial Planning Coach at acsis, the hype around the volatility in local and global stock markets has served to highlight the importance of appropriate financial planning. “The markets have been characterised by volatility over the past three years, with the SA Volatility Index, a measure of the volatility in the local equity market, reaching an average of 27.5% during this period. This has resulted in many investors waiting for things to ‘settle down’ before taking the plunge again. This strategy is however, not in their best interests.”
He says that in a way, investments are like buying a good pair of shoes. “We all know and understand why, in the long run, a good pair will be better than a cheap pair. We also expect to pay more for the good pair. In investment markets, as in buying shoes, we expect to pay more for quality investments. Unlike shoes however, investors cannot easily tell a good investment from a bad one and therefore rely much more heavily on price as a guideline. Therefore, when the share market is highly valued, investors tend to get excited and invest, but when the ‘sale’ starts, choose to stay away.”
Van Deventer says that this is in fact the incorrect mindset to have. “When prices fall, investors fail to remember that shares are the best investment in the long run, having outperformed inflation by roughly 8% (8.21%) every year for the last 20 years. When prices fall, they are therefore presented with an opportunity to buy quality shares for less.
“In times of uncertainty, the gut reaction is to take to the mountains until the storm has passed. As no one can predict when this rough patch will end, it is a tough decision of knowing when the time is right to return. The interesting thing is that the share market, on average, gives investors a negative return once every three years. This means that if the decision is made to wait for prices to keep falling before investing, the timing will be wrong most of the time. The most important weapon is therefore diversification.”
He says that investors should be making investment decisions based on choosing the most appropriate way to achieve the targeted return, so the investments can give them what they need. “In order to protect themselves against volatility, investors should consider a diversified strategy, which has significant benefits.
“Looking back at the last ten years, equities have given investors an average annual return of 17.72% at a level of volatility (risk) of 18.46%. If, however, investors were to invest in a typical balanced portfolio (60% equities, 30% bonds and 10% cash), the annual return would have been approximately 15.08%, but the volatility level would have fallen to 11.23% - roughly a third less ‘risk’ than a pure equity investment.”
Van Deventer says that the purpose of investing is to achieve a positive return and to meet investment objectives. “Investors should therefore always choose an investment strategy that maximises the expected return – and the chances of achieving it – over the chosen investment term.
“For the vast majority of investors, this should involve remaining invested in the market for as long as possible and systematically building a positive return over time, enjoying the upward trend that equity markets supplies. Investors must remember that a consequence of this ‘buy and hold’ strategy is that we need to be prepared to absorb the impact of all the bad days. Despite these bad days, equities still tend to deliver positive returns in most years, over most periods in the medium term, and almost always over the long term.”
