Tuesday, 11 November 2014 - 20:00

 

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Those of you who know me, or have seen my photo, will know that whilst I am not “follicle impaired” like a lot of men my age, there is definitely a lot more salt than pepper on my head.

One of the main reasons for the abundance of grey is the fact that the returns in financial products are seldom linear (i.e. they don’t move up in a straight line).

One of the most common products that financial planners use for long term growth is Multi Asset High Equity Funds which we used to call Balanced Funds. Below, I have attached a graph showing the average high equity manager’s growth from December 1998 to date along with pre-tax money market returns and CPI. You will see that the growth in this investment over this period has been in excess of 700%. While nobody will disagree that this growth is more than acceptable, I would like to highlight a few areas which caused most of the aforementioned grey hairs.

If you look at the period from February 2000 to November 2000 nothing seems to be wrong. However, if you analyse the results for this period you will see than investors lost 1% over 9 months, when money market yielded 7.5% for the same period. The number of calls I got from clients wanting to switch out of their high equity investment to money market was incredible. The second period of concern, which also looks fairly innocuous now in hindsight, was from June 2002 to April 2003. In this 10 month period investors really started wondering about the wisdom of investing in balanced funds because they were down 6% in 10 months and my task as a Financial Coach/ Wealth Manager was really difficult because a lot of clients I had persuaded to stay in the Investment in 2000 were now really worried, fortunately we had a good run after that and markets increased beautifully. Then came 2007…. anybody who invested money in November 2007 would have lost 21.5% by February 2009. Imagine how many grey hairs this caused, both for me and my clients. But those clients that stuck it out were rewarded in spades with incredible growth for a number of years thereafter.

I hear a number of you asking what is this reminiscing got to do with me and my investment now. The answer is quite simple: you may have noticed that the top of the graph has now had a downward tendency for the last couple of months and clients are starting to worry once more!

The fact of the matter is I can’t say whether the next 10 months are going to be like the flat period we had in 2000, the slight drop we had in 2003 or the major fall we had in 2008. We could even have a nice upswing like we had after September 2011, the fact is, returns are never linear and returns will always be variable over short time frames. Investors need to have a clearly defined plan and stick to it through the ups and downs of the market, those that have done so in the past have been richly rewarded, those that have panicked (and panic was rationally justifiable in 2008) have missed out on incredible growth.

Kind regards,

Barry Hugo

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 11 Nov 2014

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