Why it's a bad idea to exit your investments after a crash
Two investment experts have produced a graph of past stock-market crashes on the Johannesburg Stock Exchange that shows why cashing in your investments after the market has fallen sharply is the worst thing you can do.
Gyongyi King, chief investment officer at Alexander Forbes Investments, and Janina Slawski, head of investment consulting at Alexander Forbes, explain that markets go through cycles. “Sometimes they’re up, sometimes they’re down and, on occasion, their fluctuations can be drastic. It is during these drastic bouts of market volatility that even the most experienced investors can become anxious.
“Investors have recently been hit with another drastic bout of market volatility. Investment performance has fallen to levels last experienced several years ago and there seems to be no recovery in sight,” King and Slawski say.
But this is not the time to cash in, as is so clearly demonstrated in the graph below.
The graph, which shows the performance of the FTSE/JSE All Share Index during past market crashes, shows in red the fall of the index when the market experienced the crash. The orange, grey and yellow bars show the “bounce back” of the market into positive territory in the years after the crash, with the orange bar showing what happened one year after the crash, the grey bar showing the situation after three years, and the yellow bar showing the growth in the market after five years.
One must remember that you need a bigger percentage gain than the percentage the market has dropped to break even. If your investment of R1000 falls in value by 50%, to R500, you will need it to double (an increase of 100%) to get back to R1000. If it falls by 25% (to R750) it will need to rise by 33.3% (R250).
Taking this into consideration, of the nine market crashes shown on the graph, three (‘81/’82 rise in interest rates, ‘76 oil price increases, and ‘71 Opec increase) showed subsequent returns enabling you to at least have made your money back after a year. However, in all instances, you would have not only recouped your money but earned handsome profits after three years, and, in all but one instance, you would have enjoyed high - and in some cases spectacular - returns after five years.
“The markets can be a scary place at times, but long-term investors shouldn’t panic. The gains experienced over the long term outweigh the losses experienced in the short term.
The historical evidence reminds us that the biggest price swings are rare occurrences that should not exaggerate the risk and uncertainty pinned on the anticipated long-term value of an investment. Remember, investment goals are set with the future in mind. This is why staying invested for the long term is the best answer to an investment strategy that ultimately rewards,” King and Slawski say.