Winners become losers in the great profit trap – Absa

The alert has been sounded by Craig Pheiffer, Head, Private Client Asset Management at Wealth & Investment Management, Absa.

Three factors will spring the trap: eagerness to take profits "off the table”, concerns about possibly expensive levels reached in recent weeks by the JSE, and uncertainty around future market direction.

"In uncertain times, a certain and substantial cash profit looks tempting,” says Pheiffer. "But cashing in and exiting the market could be wealth-depleting in the long term.”

Pheiffer’s team is often consulted by high net worth individuals looking to build or preserve wealth in challenging conditions.

He notes: "Some investors have made 40% or 50% gains this last 18 months or two years thanks to major exposure to local equities. With the JSE at record levels and the JSE P/E ratio at 19 times earnings, we understand some significant winners are now becoming restive.

"But we’re not telling them to take their profits, sit in cash and leave the market.

"No one can predict market movements. Markets may look expensive, but that does not mean the next big movement will be down. Even if there is a pullback, the long-term investor with a well-motivated strategy usually does better in the market than out.

"When the market moves higher, you want to be invested in it and positioned to take advantage early in the upturn. Get in late, and you miss the big wealth-enhancing movements.”

In these circumstances, the profit-taker who headed for the exits misses out. A winner becomes a loser.

Portfolios can be rebalanced while remaining in the market. The net effect may be to reduce some equity allocations, but the client is careful not to liquidate totally into cash – an asset class subject to severe attack by taxation and inflation.

Clients who rebalance their holdings maintain significant equity allocations while seeking income-enhancing opportunities elsewhere in the market.

One option, says Pheiffer, is corporate bonds linked to the Jibar rate as the rate is reset every quarter while capital is reset to 100 at the same time. Should interest rates move higher, the investor is not penalised by a long lag before the uptick is reflected – a disadvantage faced by fixed deposits and one-year negotiable certificates of deposit.

Listed property as an income play is favoured by some as the forward yield is 6% to 7% while distributions show growth in the same range.

Inflation-linked bonds – "at the right price” – are another option, says Pheiffer. Some take a positive long-term view on preference shares (a poor performer recently). However, they may now be near bottom and would benefit from any interest rate rise.

Pheiffer adds: "You can’t time your way to wealth, not even on the back of good profits. Down the years, the market rewards loyalty. Stay in it.”