Adriaan Pask, Chief Investment Officer at PSG Wealth

Bear markets and market downturns should be considered normal for long-term investors – here’s why.

• While the world hasn’t technically entered a recession or bear market as yet, the likelihood that it will is high – markets decline by about 40% at least once every decade.
• Locally, we should expect the FTSE/JSE All Share Index (ALSI) to exhibit considerable volatility akin to other emerging markets
• An expectation of possible downturns and staying disciplined and invested will, in most scenarios, reward patient investors

Starting to save at a young age and saving as much as possible are two frequently cited basics. Another, less frequently mentioned variable, is that bear markets, market downturns and recessions are more normal than many investors imagine. If investors were to understand that markets could fall by about 10% almost every year, they would be more prepared and less likely to panic and make investment mistakes in volatile times like the last few months.

While the world hasn’t technically entered a recession or bear market as yet, the likelihood that it will is high. Data confirms that during an average bear market cycle, it takes more than nine months for the markets to recover. The 2022 cycle lasted eight months and markets fell by about 25%. It seemed like the markets were recovering but, given the risks, we may not have seen the end of this latest correction cycle yet.

Graph 1 below depicts how long previous bear market cycles lasted on the S&P 500. One cycle in particular, the 1973 and 1974 bear market, lasted more than 20 months. In that time, the index plunged by close to 50%, and the subsequent recovery took over five years (69 months). This data (and other research studies) has established that market participants should anticipate an equity market decline of at least 10% every 18 months, and at drop of at least 20% every five years.

Graph 1: S&P 500 bear markets and recoveries

(R) = Bear market coincides with a recession.

Sources: LPL Research and CFRA FactSet, Investopedia 

Locally, we should expect the FTSE/JSE All Share Index (ALSI) to exhibit considerable volatility akin to other emerging markets

Although emerging markets frequently offer greater long-term gains, they can also be highly volatile in the short term. Graph 2 shows how the local bourse grew – even amidst very negative sentiment caused by, amongst others, ‘Nene-gate’, the US-Sino trade war, the turbulence of the Zuma era, the Phala-Phala report, severe loadshedding, and South Africa being added to the Financial Action Task Force’s ‘grey list’. This means that, if you invested R100 in the ALSI in 2015, your investment could have grown to R162.46 (62.46% cumulative growth) over that period. Our data and other research have shown that market setbacks or declines are just part of the normal investment experience, but something that investors often forget when the next one hits. For this reason, it’s critical that investors prepare and manage their expectations when considering their wealth creation journey, especially during tough economic climates such as the current one.

Graph 2: Cumulative returns of the ALSI SWIX outpaced its global counterpart, the MSCI ACWI, in rand terms

Sources: Factset, PSG Wealth research team

There are some basic steps that investors should consider when embarking on a long-term wealth creation journey

Among the best ways to get an excellent return on your investment is to start early. The reason this is so important is mainly due to the power of compound interest. The calculations below show how the growth on an investor’s portfolio can vary depending on the amount they invest each month and the investment returns received over a general year. This demonstrates that if you start at a young age with a smaller investment amount each month, your investments could grow to more than if you had started investing later in life with the same (or in some instances an even a larger) monthly amount.

Table 1: How your investment could grow depending on your monthly contribution and the returns you receive

Source: PSG Wealth research team

A more practical example can be offered by one of our products, the local PSG Wealth Creator Fund of Funds (FoF), which is structured to offer a smoother return profile – especially during volatile times. Since its inception in 2009, the PSG Wealth Creator FoF has delivered an average annual return of 13%, which is aligned to its mandate of achieving investment returns that exceed inflation by 7%. Our data also shows that the PSG Wealth Creator FoF has beaten its sector average on a rolling 7-year basis 100% of the time, with a current performance of 8.63% per annum and 2.60% of alpha compared to its peer group (other funds in the same sector).

Table 2: PSG Wealth Creator FoF performance

Source: PSG Wealth research team

It can be challenging to make investment decisions during volatile times

Investors should try to avoid acting impulsively or emotionally when markets are extremely volatile as that might have devastating consequences for their families and future generations. Instead, exercise patience and heed your financial adviser’s counsel. It’s crucial to keep in mind that downturns occur in markets much more frequently than is generally believed. This is the ride investors can expect when investing in equities, and is also the premium one can expect when staying invested over the long-term – especially during tough times. It is ultimately this expectation of possible downturns and staying disciplined and invested that will, in most scenarios, reward patient investors.

ENDS