It is easy to get caught up in the short-term noise and negative sentiments about our economy, our politicians and the world. But when it comes to making investment decisions, investors would do better to remind themselves of their long-term objectives, ensuring they view share market behaviour from the correct time-perspective.
It can be difficult to keep a clear head when making decisions, especially at times like these when the world seems to be a mess. In such an environment, it is easy to become despondent and make the wrong decisions, or act emotionally. However, sound long-term investment decision-making actually depends on the ability to ignore the short-term noise.
The current sense of disruption rests on political uncertainty here and abroad, as well as disappointment with how the markets are performing.
The behaviour of the markets over the last two years has certainly not helped build our confidence. The JSE has generated low returns, despite the ups and downs in between. Over the two years until the end of February, the index returned a meagre 0.88% per annum, which creeps up to 3.87% when dividends are included. This has left many investors wondering if it is worth the risk, and considering withdrawing from the share market altogether. But taking a long-term view is essential.
Why your decision-making horizon matters
People are living longer. Therefore, even retired investors could face an investment horizon of 30 years or longer. Focusing on short-term volatility when deciding where to invest is therefore a mistake. This view is not informed by our outlook for the market for the remainder of the year. Rather, it is based on a wealth of evidence about how the markets behave in the long run.
Markets are unpredictable – you could miss out
Counter-intuitively, the short-term volatility of markets means it is important to remain invested. We do not know when the markets will recover, but we understand that markets can move rapidly, and that those who sit on the sidelines are likely to miss out. Missing out on a few key days of growth can make a significant difference to your long-term returns, as volatility plays its role.
You and volatility over time
While we do not know what 2017 will bring, we can say that its importance in the life-span of your investment will diminish over time. Trying to time the market is difficult and fails more often than it succeeds. When we realise that we are invested for the long term, the perceived riskiness of a share portfolio is not as high as many investors think. The best advice is therefore to stop worrying about the return you are likely to see in the stock market over the next week or month.
Your time would be much better invested ensuring you portfolio is suitably diversified and aligned to your needs. By doing so, you are far more likely to reach your investment destination successfully.
Issued by PSG Wealth