Investing would be a lot easier if you could predict the future. Failing that, looking at the past is your best option to avoid making the same mistakes, says Louis van Rensburg, a financial planner at PSG Wealth.
The stock market has simply moved sideways over the last few years, while providing investors not much more than volatility.
The JSE peaked at 55,188 points in April 2015 and by 1 May 2017, was hovering at under 54,000 points. This means that, for almost two years, the JSE has produced negative returns.
Many investors have pointed out that if they were invested in cash only, they could be doing better.
When investing in stocks, do so with a long-term goal in mind and don’t seek out alternatives in the short term. Nonetheless, it only seems natural to consider this option when markets are moving sideways.
Since predicting the future is impossible, we must rely on history to show us what we can expect from stocks. Despite volatility in the short term, stocks are the best asset class for achieving growth over the long term.
History also shows us that even if we invest at the peak of a cycle, thus entering a bear market, we will ultimately achieve the long-term returns that we expect out of stocks.
The advantage of looking back
Recent research by Morningstar, a well-known international investment research company – highlights interesting points about returns on the JSE.
Looking at a 20-year period, from 1995 to 2016, the research showed that the returns obtained by simply staying invested throughout the 20-year period was 15.1% per annum. So R1 million invested in 1995 would be worth more than R15.6 million in 2016.
Additionally, for any one year period chosen within the 20-year period, returns would have been positive 82% of the time and negative only 18% of the time. Over any three-year period, the JSE produced positive returns 98% of the time. And over any 10-year period the JSE produced only positive returns.
This confirms what we all believe – stocks will remain volatile in the short term but will outpace other asset classes over the long term.
Why not time the market then?
Despite these facts – and here we have human nature to thank – people would rather look for better returns by trying to avoid the negative periods altogether. Investors try to identify high points so that they can sell, and then identify low points so that they can buy back into a rising market.
If we take a technical look back at market trends we can see that there were indeed opportunities there. Given the benefit of hindsight, this all seems pretty obvious, so why not try to work the market in this way?
Firstly, personal income tax at a rate of 45% will be applied to such trading if it is done regularly. This is as opposed to the capital gains tax of up to 18% which would apply in the case of a buy-and-hold philosophy being adopted. Secondly, the statistics from the research highlight some major risks inherent in this approach.
If you’d missed out on only the best 25 trading days over the 20-year period in questions (0.5% of the total 5 264 trading days) your average return would have fallen to 8.2% per annum – the same R 1 million would have grown to just R 3.8 million; R11.8 million less.
If you missed the best 75 days – still less than 1.5% of the total trading days – you might have reduced your returns to 0% over the entire period.
Unless you can predict market movements with 100% accuracy – and nobody has or will ever be able to do so consistently – the risk is too great to speculatively try to sell during the peaks and buy again during the troughs. If you get it wrong by just a few days, you can easily miss out on all your potential returns.