If you consider the long-term performance of the different asset classes, you will find that equities out-perform the others. But there is no telling what equities could do tomorrow, over the next week, or the next month, Paul Hutchinson, the sales manager at Investec Asset Management, says.
Hutchinson says investors in equities might find it useful to meditate on an analogy used by Ralph Wanger, the founding partner of Chicago’s Wanger Asset Management, about watching a woman walk a Golden Retriever in a park.
While the woman walked at a steady pace through the park, the dog romped around the grounds. Trying to guess where the dog would run next was difficult, but the dog came to the park with its owner and left with its owner. You know where the dog started and where the dog ended up, although the dog’s movements were unpredictable during the 30 minutes it spent in the park.
Like the dog’s movements, short-term market movements are unpredictable. This makes for exciting reading in the media, but you need to remember that equities out-perform other asset classes over time – to continue the analogy, the dog will leave the park with its owner, Hutchinson says.
He says that if your equity investment falls by more than, say, 10 percent, you may feel anxious and want to flee to the perceived safety of cash. However, as difficult as it is, the best thing may be to do nothing.
Consider an investor exposed to the MSCI All Countries World Index, which lost 51 percent from October 2007 to the bottom of the global financial crisis in February 2009. If the investor had invested US$100 000 in 2007 sold out of the index at the bottom of the market and only re-invested a year later, he would have US$88 351 today, whereas if the investor had remained invested, he would have US$139 385, or 58 percent more, today.
Click here for a graph that illustrates the benefits of staying invested.
US research company Dalbar has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds (US unit trusts or collective investment schemes) over short- and long-term periods since 1994.
Dalbar’s research shows that, on average, investors earn less – in many cases, much less – than the fund in which they invest. This is because of self-destructive behaviour: investors sell when a fund’s performance bottoms and buy when its performance peaks, Hutchinson says.
“No matter what the state of the mutual fund industry, boom or bust, investment results are more dependent on investor behaviour than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market,” Dalbar says.
Hutchinson says although there is more noise and media commentary about market instability, investors should not panic. Instead, they should recommit to their long-term investment goals and remember that they are most likely to achieve them with time in the market, as opposed to trying to time the market, he says.
Article credit: http://www.iol.co.za/business/personal-finance/rewards-if-you-ride-out-the-equity-markets-troughs-2082522; Author: Laura du Preez