Be careful

The global market recovery in the second quarter of 2003 reversed disappointing equity returns caused by the prolonged bear market.

This gave impetus to a move by investors back into market-related asset classes such as equities, attracting large assets into equity unit trust portfolios.

For the year to end March, there was a R2.9 billion net inflow into general equity funds compared with outflows of R2.6 billion for the year to end March 2003.

This attests to the trend of investors switching back into equities when equity markets improve. Over the 12-month period April 2003 to end March, the FTSE/JSE All Share Index rose 43.75%, after being down negative 27.5% in the same period in 2003.

These figures show the correlation between market performance and asset flows.

Investment Solutions head of retail marketing Mark Lapedus says these statistics show investors are again trying to time the markets, basing switches in and out of asset classes on performance.

"It frequently happens that money flows into an asset class after it has shown improved performance, which is usually precisely the wrong time to invest in that particular asset class.

"The vast majority of investors will not be successful in timing markets. They will end up losing money adopting a strategy based on market timing rather than diversification of assets.

Because the improved performance of equity unit trusts in the latter half of 2003 is directly correlated to general market performance, and market performance is sensitive to and dependent on external local and global market factors, as well as market sentiment, equity unit trust performance is unpredictable," says Lapedus.

He stresses the danger of investors switching into equity unit trusts when markets show a recovery, and moving into other non-market correlated asset classes when equity markets are down. He adds that past performance and "following the herd" have proven unreliable indicators of future performance.

"Investors need to go back to basics with their investment needs," says Lapedus. "That is, investors should determine an asset allocation suitable to their long-term investment objectives and risk tolerance.

This asset allocation ideally needs to be prepared in conjunction with a financial adviser, who will assess the investor's risk profile, cash flow requirements and other personal circumstances to compile a suitable investment portfolio and long-term financial plan.

"The financial plan needs to be carefully constructed to ensure the investor understands exactly what is being bought and the risks associated with the portfolio.

“The past performance of the portfolio must not drive the investment decision. Also, no one asset class or investment vehicle should be considered in isolation, but rather as a necessary component to achieve a long-term investment objective since different asset classes will perform differently at different times," says Lapedus.

It is natural for investors to get discouraged in bear markets and to want to change strategy, but they are often at a point in the investment life cycle when changes could be detrimental to their overall investment portfolio, he says.

"Investors need a well-balanced and diversified portfolio, with a spread of assets across all classes (cash, bonds, equities and property) locally and globally, designed to meet their risk profile, to ensure they can meet long-term investment objectives.

“This has proven a far superior approach than trying to select the best-performing fund or asset class in the last quarter or year and hoping it will do so again."

Lapedus warns investors that "trying to make a few quick bucks" often leads to disappointment, as was the case in equity unit trusts before last year's recovery when many investors realised they were too heavily invested in equities.

Editor’s note -health warning: don’t misconstrue this article to be advice. Check with the specialists first. Do a proper needs’ analysis. Take a second opinion.

This gave impetus to a move by investors back into market-related asset classes such as equities, attracting large assets into equity unit trust portfolios.

For the year to end March, there was a R2.9 billion net inflow into general equity funds compared with outflows of R2.6 billion for the year to end March 2003.

This attests to the trend of investors switching back into equities when equity markets improve. Over the 12-month period April 2003 to end March, the FTSE/JSE All Share Index rose 43.75%, after being down negative 27.5% in the same period in 2003.

These figures show the correlation between market performance and asset flows.

Investment Solutions head of retail marketing Mark Lapedus says these statistics show investors are again trying to time the markets, basing switches in and out of asset classes on performance.

"It frequently happens that money flows into an asset class after it has shown improved performance, which is usually precisely the wrong time to invest in that particular asset class.

"The vast majority of investors will not be successful in timing markets. They will end up losing money adopting a strategy based on market timing rather than diversification of assets.

Because the improved performance of equity unit trusts in the latter half of 2003 is directly correlated to general market performance, and market performance is sensitive to and dependent on external local and global market factors, as well as market sentiment, equity unit trust performance is unpredictable," says Lapedus.

He stresses the danger of investors switching into equity unit trusts when markets show a recovery, and moving into other non-market correlated asset classes when equity markets are down. He adds that past performance and "following the herd" have proven unreliable indicators of future performance.

"Investors need to go back to basics with their investment needs," says Lapedus. "That is, investors should determine an asset allocation suitable to their long-term investment objectives and risk tolerance.

This asset allocation ideally needs to be prepared in conjunction with a financial adviser, who will assess the investor's risk profile, cash flow requirements and other personal circumstances to compile a suitable investment portfolio and long-term financial plan.

"The financial plan needs to be carefully constructed to ensure the investor understands exactly what is being bought and the risks associated with the portfolio.

“The past performance of the portfolio must not drive the investment decision. Also, no one asset class or investment vehicle should be considered in isolation, but rather as a necessary component to achieve a long-term investment objective since different asset classes will perform differently at different times," says Lapedus.

It is natural for investors to get discouraged in bear markets and to want to change strategy, but they are often at a point in the investment life cycle when changes could be detrimental to their overall investment portfolio, he says.

"Investors need a well-balanced and diversified portfolio, with a spread of assets across all classes (cash, bonds, equities and property) locally and globally, designed to meet their risk profile, to ensure they can meet long-term investment objectives.

“This has proven a far superior approach than trying to select the best-performing fund or asset class in the last quarter or year and hoping it will do so again."

Lapedus warns investors that "trying to make a few quick bucks" often leads to disappointment, as was the case in equity unit trusts before last year's recovery when many investors realised they were too heavily invested in equities.

Editor’s note -health warning: don’t misconstrue this article to be advice. Check with the specialists first. Do a proper needs’ analysis. Take a second opinion.