Dr Adrian Saville, Chief Investment Officer of Cannon Asset Managers, explains how investors can make the most of an unhappy economic outlook…
One of the greatest enemies of successful investing is emotion.
In making an investment decision, being too optimistic in good times, or too nervous in tough times, often leads to the wrong call. Trying to time investment entry and exit points precisely is a futile pursuit, with investors normally taking the decision too late. For instance, those who sold out of equities after the 2008 market crash would have done so after bearing the brunt of the sell-off, only to sit on the side lines waiting for the dust to settle. When the market turned in March 2009, news was at its bleakest and sentiment at its most pessimistic, but equities nearly doubled over the following two years. Unfortunately for them, most investors re-entered the market after the initial rally, thereby missing out on some of the largest gains.
A key factor in investing success is the ability to stick to a long-term strategy.
Investors should establish their own risk profile, based on their long-term objectives and time frame to retirement. Then, when selecting investments, they need to keep this risk profile in mind and avoid focusing on near-term market sentiment. The longer their investment time frame, the more risk investors can bear and the more equities their portfolios should have.
Equity volatility is actually an investors’ friend, as most of the return enjoyed is determined by the price that is paid: the lower the price, the greater the long-term returns that can be generated.
Volatility means prices fall (representing buying opportunities) and rise (reflecting selling occasions). No matter how good a stock’s future might look; if you pay too much for it you’ve made a bad investment.
The evidence is compelling: when markets are on low cyclically adjusted price:earnings ratios (CAPEs), investors enjoy handsome subsequent returns and vice versa.
In short, when investors are the most pessimistic is exactly the time at which to invest and, critically, when markets are their most euphoric it is not the time to be allocating more money to equities. The JSE is at present attractive, not despite but because of the poor environment in which Europe finds itself.
In trying to time the market, investors risk investing emotionally and thus make bad decisions. In trying circumstances, it is easy to disregard a strategic view and make decisions based on prevailing emotions, a sure route to failure. Investors need to remain faithful to their long-term strategy and to be patient.
Article continues on page two and three...