Stay the course

April 3, 2020

Given the recent volatility on the JSE due to the coronavirus pandemic, it may be very tempting for you, as an investor, to pull out of equities and switch to cash. The last few weeks have been tough for investors. After a day of steep declines, markets recover for a short while, only to have them decline again.

 

When it comes to your investments, you should, however, avoid reacting to falling prices by exiting the market. In fact, selling out of the markets in a panic when they fall, will prevent you from participating in returns when markets eventually recover. In attempting to time the market, investors try to predict when the equity market is going to move up or down, and switch between equity and other asset classes accordingly.  We caution you against this. Time has shown that investors are better off not reacting to short-term market movements, and sticking to their long-term plan.

 

History has proven that an attempt to time the market could result in missing an opportunity to participate in the best bounce-backs. Although the fundamental detail and reasons behind the current situation are largely different from past market crashes that have happened, we’ve used previous market crashes as examples below to highlight the impact of exiting the market when it experiences a serious decline.

 

When Russia defaulted on its debt obligations in August 1998, emerging markets all experienced severe downturns, with South African equities losing 32% from the end of July 1998 to the low point in September 1998. The chart below shows that investors would have experienced a grand loss of 32% over the above-mentioned period, but by mid-April 1999 the market had recovered all its losses.  This is demonstrated in the chart below:

Source : Morningstar Direct and SI calculations: July 1998 to April 1999

 

In September 2008, world financial markets came under severe pressure due to the subprime crisis which led to the failure of massive financial institutions in the United States. The ALSI reacted and experienced a severe downturn. By mid-November 2009, the ALSI had recovered from its lows as can be seen in the following chart:

Source: Morningstar Direct and SI calculations: August 2008 to October 2009</