Stay Invested | Rough seas make good sailors
During 2022 we often wrote about rising inflation, increasing interest rates and heightened geopolitics. We unpacked in detail the effect they have on the market and how they influence our outlook for growth in different asset classes. Unfortunately, we expect these influences to keep markets volatile for the foreseeable future.
“Sometimes there is no time for the sea to calm down! If you have to reach your target, let your voyage start and let the storm be your path!” ― Mehmet Murat Ildan
The ups & the downs
The performance graph below shows the volatility that was experienced in equity indices across the globe over the last year. The JSE All Share represents South African equities, MSCI AC World is a combination of 23 developed and 24 emerging markets and lastly the Standard & Poor (S&P) 500, represents the 500 biggest companies in the US. The graph reflects the major highs and lows in the last 12 months.
As illustrated above, 2022 exhibited extreme volatility; leaving most investors uncomfortable. It is important to remember that economic downturns are a part of the investment cycle. Cycles in investment markets refer to ups and downs, resulting in good and bad performance periods. Markets are always being influenced by changes in the economic and political environment, but also enormously influenced by investor attitude and sentiment. If investors are optimistic about a stock, they buy more, and the share price goes up. On the other hand, if investor sentiment is low and negative, they sell and the share price falls. Investors are human, and humans are emotional beings, therefore investors’ emotions have a huge influence on share price and market movements.
We all have loss aversion instincts; the pain of losing money is more significant than a similar gain, but if we sell when the market is down, we realize an actual loss. On the other hand, if we stay invested and stick to our initial plan, it is very probable that the market will recover.
Periods of poor returns always give way to periods of great returns and vice versa. Avoiding the market’s downs may mean missing out on the ups as well, therefore you can’t afford to lose out on the best few days in the market.
The influence of missing the best days in the market Market rebounds can happen quickly and furiously and losing out on a few of those outlier days can have a big influence on your overall return.
Looking back at the S&P 500 from 1995 to 30 September 2022; you had 28 years, or 6,993 days of trading. If you had stayed invested in the market, your compound annual growth rate sits at 7.7% percent or a cumulative return of XXX%. What if you failed to trade on the best five of those 6,993 trading days? The consequences are shocking. Your return falls to 5.9%, or a 23% lower annual return than if you had left your money in the market, and it only gets worse and worse the more days you sit out.
Don’t throw your investment strategy overboard in the middle of the storm. Keep your focus on your long-term investment plan. Staying on course when seas are rough.
Conclusion
“The good seaman weathers the storm he cannot avoid and avoids the storm he cannot weather.” Unknown
It’s important to partner with an investment group that has the knowledge and track record to proactively manage risk in heightened market volatility.
Downturns in the market are temporary and volatility can provide opportunities for portfolio managers. Stay invested and focused on your long-term investment plan. The Optimum Investment Group’s focus is to keep an eye on the wind and steer the sails, keeping your boat on course.