What’s that sound?
(22.7.04) Investors who follow market trends rather than stick to an investment plan that matches their risk profile are more likely to lose their money than realise a healthy profit.
“Investors who invest in the current top performing sectors or funds often invest too late and realise losses by disinvesting at the wrong time,” says Nico Coetzee a fund analyst at Sanlam Personal Portfolios (SP2) Advisory Service.
Many investors in the resources fund, depicted in the graph, invested twice and disinvested once at the wrong time over the past six years.
“By investing when prices are already high, investors miss out on the initial upswing in performance – the lion’s share in terms of returns – and the price is more likely to drop before they can disinvest,” he says.
“When prices are low, it is wise not to disinvest or investors may realise a loss.”
He says “it does not make sense to invest two months after prices have peaked,” as the majority of investors did in this fund.
The resources sector is “highly volatile and should be attracting long term investors who can accept the higher risk inherent to this investment class and are able to ride out the dips.”
In another example Coetzee says the strong rand provides an ideal opportunity to invest offshore.
“Investors are largely ignoring the benefits of the favourable exchange rate – there was a R495m net outflow from foreign funds during the second quarter of 2004.”
It is difficult to know which asset type, sector or fund will be next year’s winner.
While general equity funds have provided returns of around 30% over the past 12 months to 30 June 2004, he says it was better to be in cash during the June quarter as the FTSE/JSE All Share Index (ALSI) declined by 4.7%.
Bond funds outshone equities and cash in the past five years, with returns of 125% vs 70% returns from the ALSI.
“Most fund managers agree, however, that equities is still the best asset class in which to invest in the long term,” says Coetzee.
“Many investors want to be in cash currently but this may not be the best decision. Investors who remain in cash, rather than in bonds due to uncertainty in this sector, may miss an upkick in the bond sector.”
Many portfolio managers currently favour financial and industrial shares, which are expected to outperform the other sectors, he says. The low interest rates and low inflation environment favour growth in these sectors.
“It is also difficult to time the market when investing,” says Coetzee. “To avoid investing at the wrong time – when prices may be high – investors should rather phase money into equity investments over three to six months.”
