Applying Investment Principles in Volatile Markets

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By Raimund Snyders

The past six months have seen a lot of volatility in investment markets. The Namibian Stock Exchange (NSX), and indeed world markets have been on a rollercoaster ride, with big movements seen in share prices over short periods of time.

The market showed negative performance for the past month (-4.3%), a positive performance for the past three months (1.73%), and negative performance again for the past six months (-2.1%).

The one-year return until end of March is again positive (5.82%).

The N$/USD exchange rate has also been deteriorating sharply, and currently stands at 5-year highs. We last saw an exchange rate of N$8 to one US Dollar in February 2003.

All these ups and downs have brought a lot of uncertainty for investors. It is scary to put your hard-earned money into an investment and to watch it swing up and down all the time. The temptation is to try and outguess the short-term market swings, but it is just too much of a gamble to attempt this.

The question then is what an investor should be doing about their portfolios now. Should you change your portfolio now? Should you get out of shares and move it to a safer place or is this actually a time to be moving more of your funds into shares? Should you consider taking more money offshore to protect your portfolio against the weakening local currency?

These questions are best answered through a look at the tried and tested investment principles. These principles have been proven over many years as the basis of most successful investment strategies.

Think long-term
If you want to achieve long-term investment success, you must be able to accept short-term market volatility. Looking at it from a historical perspective, the recent market volatility is to be expected and it is not unusual. The stock market rarely moves in only one direction, whether up or down, without some short-term movement in the opposite direction along the way.

However, the overall long-term historical trend has been an upward one. Just looking at our Namibian stock market, the 3-year performance of the NSX has been 32% per year.

Another good way to illustrate this is by looking at the South African stock market (as represented by the JSE All Share Index).

From 1995 to 2008, through numerous bull (upward) markets and bear (downward) markets, shares have provided an average annual total return of more than 15%.

Also, the pie charts below show that while the stock market has declined 21% of the time on a one-year basis, this percentage decreased to 7% when the time horizon extended to any continuous 3-year period.

When looking at an even longer timeframe, the stock market has never produced a loss during any continuous 5-year period from 1995-2008. This, of course, does not guarantee that it will be true in future too. However, having a longer investment time horizon can help investors in riding out inevitable short-term market downturns.

History of Stock Market Losses (1995-2008)%

Spend time in the market
Linked to the principle of taking a longer-term view on your investment portfolio is the principle of not trying to time the market, but to rather spend time in the market. Trying to work out which asset type will produce better returns in the immediate future is a near impossible exercise.

What most investors end up doing, is locking in losses of the past, thereby achieving just the opposite result as opposed to the objective they had.
The more advisable approach is to make sure you participate in the correction of a market decline that you experienced. The only way to achieve this, is to make sure you are in the market.

Statistics show that most market timers are too slow to get back into the market, losing out on market corrections. Again, the more prudent approach is to ride out the downswings, in order to participate in the upswings.

Diversification lowers your risk
Different kinds of investments tend not to move in sync, so you may be able to lower the total risk (and therefore the volatility) of your portfolio by investing in more than one type of asset.

A downswing in one type of asset may be balanced by an upswing in another type of asset.

If you already have investments, take a look at how they are allocated among shares, property, bonds (like treasury bills) and cash. Then look at how your investments are spread between local and offshore assets, and how your shares are split between small and large companies.

If you’re just getting started, consider a unit trust or endowment policy with a good track record and where your contributions are invested in a variety of different types of assets.

Investing in a variety of assets is almost a guarantee that you will not get the best returns over time, as there will always be one of the types of assets that do better than the others.

On an overall basis though, the better performing assets will balance out the poorer performing ones. It is easy to look to the past and see which would have been the best asset type to be invested in, but when looking to the future, it is not that easy.

Even the professionals get this wrong. It is therefore usually better to invest in a diversified basket of assets, and to not look at one type of asset in isolation, but to rather look at your investment portfolio as a whole.

Invest regularly to benefit from dollar averaging
We all know that the value of investments go up and down, but that over the long term, they almost always go up. By investing a regular fixed amount, you buy into assets at the varying values they are at, at the time of investment.

If the markets are up, you get a smaller piece of the assets you invest into, as the asset is more expensive to purchase.

Conversely, if the markets are down, you get a bigger piece.

By buying on both the up- and downswings in the markets, you average out the price (or value) of the assets that you invest into, and through this, you can take out a lot of the volatility that exists in the markets. This way, you turn the volatility into your favour.

Stick to your plan

Your investment strategy should be designed to meet your personal objectives, whether it is making provision for your retirement, saving for your children’s studies, or any other goal you may have. You should have an investment plan that takes cognizance of, among other things your risk profile, your age, your debt position, all the types of assets you have in your portfolio, your investment goals, your income.

Once you and your financial adviser have designed a plan, you should not let short-term market volatility influence your investment plan.

The only question you should have during times of volatility, is whether your circumstances, requirements and objectives have changed as a result of the volatility. If not, you should stick to your plan. Usually, market volatility in itself does not alter your plan.

You will be well advised to consult your adviser to revisit your investment plan, at least to confirm that you are still on the right track.

Your adviser should be in a position to reconfirm these investment principles to you, and to put you at ease with regard to the impact of the market volatility on your investment.

– Raimund Snyders is the Chief Executive Office: Old Mutual Life Assurance Company (Namibia)

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