Bouts of market volatility may be unsettling but they are an unavoidable feature of long-term investing. The important thing is to avoid making mistakes along the way. These investment guidelines hold true for any environment, but they’re particularly useful to keep in mind during times of extreme volatility.
1. Avoid market timing – you’re better off sticking to your long-term strategy
Most attempts at timing the market fail, and missing out on some of the market’s best days during the early stages of the recovery can significantly impact your investment returns. Although we’re currently experiencing unprecedented levels of volatility, market downturns are not the end of the world. In fact, stocks that have been battered by unfavourable conditions offer excellent (low) entry points to the markets. Remember, the goal here is not to avoid the effects of Covid-19, but to build wealth over time and retire comfortably.
2. Remember that cash is not risk-free
Investors tend to flee to cash during turbulent times, but investing in cash assets is by no means a costless transaction. Research shows that even in a low inflation environment, the value of cash assets will erode over time. Investors run the risk of losing their purchasing power through rising prices. While holding cash will protect the nominal value of your money, in today’s environment of low interest rates, it means losing real value.
3. When returns and contributions suffer, invest for longer
Building wealth is not an exact science. However, a combination of starting early, increasing contributions, investing in higher return products and investing regularly has proven to be successful. If you’re running into a situation where your returns are under pressure (like now), you will either have to increase your contributions or invest for longer to make up for it. If you’re not in a position to invest right now, then you may need to invest for longer than you’d initially planned.
4. Don’t forget who wins the race in the end
Academics from across the globe have argued that it doesn’t matter which geography you look at, nor what period you look at – generally, if you’re going to invest for a long-term period, equities will outperform other asset classes. While equities currently remain under pressure, it is important to understand your long-term journey and look at the bigger picture. Now is not the time to be overly conservative, driven by the fear of what might happen next. Truth is, you will probably live longer than you anticipate. Therefore, you possibly have time on your side, which is the most valuable resource in the investment world. Market downturns are part and parcel of every investment cycle. Try to filter out the noise and concentrate on the long-term performance of your portfolio.
Investing in one asset class is a sure way of increasing the risk within your portfolio. Maintaining a diversified portfolio that offers the asset mix that suits your goals, together with a mix of fund managers, is the best course of action.
6. Find comfort in valuations
It is not difficult to imagine why many investors are disheartened by SA Inc stocks at the moment, but research shows that it’s not just SA Inc that’s facing headwinds. Valuations are at extremely cheap levels and although it’s been painful to reach this point, the worst thing that you could do now is to exit the market.
The best advice is to stick to your long-term investment plan and your risk profile and wait for the storm to pass. Investment returns over the next five to 10 years should be significantly better than what we’ve seen in the last decade.
Adriaan Pask is the chief investment officer PSG Wealth