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Challenging market conditions – what’s the best course of action?

We’ve all heard the saying, “It’s time in the market – and not timing the market – that counts.” But what does this mean in practical terms and how does timing the market affect your investments?

Human emotions

Stanleur says as humans we have an emotional attachment to money because we work hard to earn our money. Of course, volatile markets can cause panic, especially when we see the value of our investments falling. But this is not the time to panic, nor the time to make emotional decisions.

No-one can be certain about what markets will do in the future or what returns will be like for the various asset classes (e.g. property, equity, bonds and cash), but what one can be certain of is that volatility is constant. In these uncertain times, investors are faced with a very important decision – whether to stay invested in the markets and bear the brunt of the tough economic climate, or rather switch to cash.

Timing the market is practically impossible

Stanleur says that according to Glacier by Sanlam, one should remember that cash reduces an investor’s purchasing power once taxes and inflation are accounted for. Also, investors wanting to switch their investments to cash will need to get their market timing right – something not even investment professionals can claim to get right all of the time. When trying to time the market, the investor has to make the correct call twice – first deciding when to switch into cash, and then again when to switch back into growth assets.

Getting it wrong may cost you

Because it’s practically impossible to predict when to switch, it is highly likely that investors will miss some of the best days in the market. If you miss even a few of the best days, it can have a lasting impact on your portfolio returns.

Growth assets outperform over the long term

Figures from Glacier’s research team show that SA cash has only outperformed SA equity and SA bonds once over the period 2001 to 2017.

What should investors do?

  • Don’t try to time the market.
  • Don’t make emotional decisions based on short-term uncertainty.
  • Remember that, on average, growth assets will provide a better return over the long term (a minimum of five years, ideally ten years).
  • Understand your long-term investment plan… and stick to it.
  • Be disciplined and stay invested.
  • Enlist the advice and assistance of a licensed financial adviser to co-create an investment plan that is underpinned by your financial needs and risk appetite.