While remaining positive in the current economic environment is difficult, it is especially crucial for investors building wealth toward their retirement to do just that. Projections of poor economic growth in 2020 may have placed even the best-laid investment plans under pressure to deliver the returns that many investors are counting on for their retirement.
It may be difficult at the moment to believe there is light at the end of the tunnel, but history tells us that downcycles end and are invariably followed by the next upcycle. This is the view of Collin Nefdt, Old Mutual Corporate Consultant, who says as difficult as it may be, he urges all investors to temper the urge to tinker with their investments.
“Compounding their fears about the future, investors are now facing the possibility that the economy is likely to remain under pressure for longer,” Nefdt says. “It is only natural that investors may want to alter with their long-term portfolio to counter these adverse effects.
“However, the long-term benefits of staying the course far outweigh the short-term psychological gains from moving into seemingly less volatile assets.”
Nefdt’s confidence that markets will continue to behave as they have done for centuries is reinforced by the 2018 book by respected investment manager Howard Marks, who is co-chair of Oaktree Capital Management in the USA.
In Mastering the Market Cycle, Marks says markets fluctuate between fear and greed because people oscillate between these two powerful emotive responses. This leads to extremes in behavior driven by irrational exuberance when markets are strong, and excessive caution when the cycle is at its lowest.
Nefdt points out that these swings are precisely the type of opportunity that professional investment managers seek out to strengthen their long-term performance.
“These cycles are simply how markets work. We understand that up and down cycles repeat themselves, even though each one has slightly different characteristics, duration and nuances,” says Nefdt.
“Successful fund managers not only accept the cyclical nature of things, they enthusiastically wait for downcycles because of the volatility and bargain prices they produce.”
It is this disciplined, pragmatic approach to markets that investors buy into when they partner with an investment manager, Nefdt says.
He suggests that there are several ways that retirement investors can prevent knee-jerk reactions that could hurt their long-term returns.
Don’t look at your retirement value incessantly
“Investors should resist the temptation to view their portfolio balances too frequently. Looking at returns of the South African equity market since 1925, a recent study conducted by Old Mutual Investment Group showed those investors who checked their returns on a monthly basis ran a 38% probability of seeing a negative return versus 20% for those investors who checked the performance of their investments every 12 months,” says Nefdt.
“This will only add anxiety and fuel the urge to take action when none is needed from a long-term perspective”.
Get some perspective: Speak to a professional before acting
Financial advisors can provide much-needed perspective to investors on the importance of accepting market downturns. They can also, more often than not, assure you that the occasional weak or negative market is a normal part of long-term investing.
Make a commitment
“Investors need to make a deliberate effort to maintain a long-term orientation and make a commitment to following to applying a long-term mindset. For investors, the commitment to pursue a long-term mind-set should be written into your financial plan and routinely articulated at the start of a performance-related discussion with your financial advisor,” says Nefdt.
“We believe that investors who acknowledge the existence of cycles and understand that we are at a low point in the cycle should be better off versus those that don’t,” he concludes.
“We have been at these low-return levels before, and in each instance, the next move was to above-average returns. Without the understanding of cycles and a sense of where we are in the ‘cycle of things’, one is likely to overreact.”