No two ways about it: realising losses in an investment portfolio is painful. It happens to every investor and forms part of any investment journey. Psychologically, however, we seem ill-equipped to deal with losses. And when losses start to stack up in one’s equity portfolio, fear creeps into our decision-making process and emotion takes over as opposed to rationality and discipline.
we want to sell our market exposure as we fear the market is going to go lower, and we want to protect what’s left
February was quite a wake-up call for investors with the JSE All Share falling close to 9%. To put this into perspective, the last time the market did worse than 9%, was February 2009! That’s more than 10 years ago and in the middle of the Great Financial Crisis. What caught investors off guard and the thing that further exacerbated the selling pressure, was the speed of the decline. The S&P500 (the largest index in the world), sold off more than 13% in just 7 trading days.
If history is anything to go by, short-term volatility is perfectly normal in equity markets. And markets are always on edge and poised to move along the line of least resistance. This volatility can result in a wide range of positive or negative outcomes depending on the position that you took (and more importantly, when you took that position). The reality is that every market correction seems different while you are living it. However, after the fact, one realises again that the only certainty in markets are the existence of cycles and even though history doesn’t repeat itself, it often rhymes.
A tale of 2 decades
The past 5 years in the JSE All Share has been a tough pill to swallow for investors. Ranging from large drawdowns, scandals and basically zero growth ex dividends.
Below is a chart that shows the JSE All Share Price return over the past 2 years.
At a first glance, this chart does not instil any confidence in an investor allocating any assets to the equity markets. There have been two drawdowns of close to 15% and you can get 7% in the bank I hear you say? If one however looks a little bit further back, the All Share has annualised closer to 8.2% since the beginning of the previous decade. Compare this to 2001 to 2010 and the market annualised 17.7%. And annualising 13% since the start of the millennium
So, what happens to your return profile if you are a long-term investor and make an active decision, to not try and time the markets?
Over the past 60 years, the JSE All Share has still provided annualised returns of more than 14%
It is clear that over the course of your investment journey there is nothing you should expect more than the unexpected. Diversification, discipline around your time horizon, investment goals and objectives remain key.
Staying invested, is an active decision which you cannot afford to get wrong.