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Investment Strategy
Saturday, September 1, 2007
Ignore the wobbles

In the midst of the market turmoil clients and financial advisors are understandable getting a bit nervous.

“Is the market going up or down?” they ask. Some of them even went as far as asking PSG Investments how it was repositioning its funds in the midst of the negative movements. The answer to the question is that it depends on one’s time horizon.
Says Philipp Worz, of PSG Fund Management, “We suppose a fair amount of people perceive asset managers to have uncanny predictive powers, but the fact of the matter is we know just about as little as anyone else.
“What we do know, however, is that by carefully selecting stocks on solid fundamentals, which are attractively priced for their reward and risk characteristics over the long-term, one need not worry about where the market will be in a week or two.
“People need to remind themselves that investing (as opposed to speculating) should be a long-term game. Investors should not get bogged down by daily or weekly volatility. Rather, they should focus on the big picture, assess their financial plan and ask themselves why they have invested in equities (wholly or - more likely - as part of their portfolio).”
History has repeatedly demonstrated that markets do not move up, or down for that matter, in straight lines. “Our view,” he adds, “is that people who seek the best real returns over time must also be prepared to accept some pull-backs over the shorter-term. If you are not such an investor, then stay out of shares and rather put your money into the money market, which by the way is currently providing an attractive real return of around 3%.
“We believe that, by following a few simple long-term investing rules you will gain the power to stop sweating the small stuff and start to appreciate the beauty of long-term investing.”
It all starts with a plan. As cute as it may sound, it is true that “those who fail to plan, plan to fail”.
All successful long-term activities must start with a plan. In formulating this plan, cognizance must be taken of important issues like goals, risks, contingencies, duration of the venture and so on. For the uninitiated (and let’s face it, until the importance of long-term investment and such subjects become taught at schools, most of us are novices when it first comes to investing) it is best to find a good guide to help you through the unchartered waters. A good financial adviser will be able to assist you with putting in place a financial plan that is right for your particular circumstances.
“Turning specifically to the equity portion of your investments,” says Mr Worz, “it is important to remember only to invest in equities if you have a long (five-years plus) time to realise your investments and are willing to accept the psychological pain of watching your hard earned (and hard working) money go down at times.”
When running the ‘Up hill’ of the Comrades Marathon, the route is full of ups and downs before you finally end up at the finish a substantial distance higher than from whence you started. Also, remember the power of Compound Interest. The longer the investment period, the more your money will work for you - so start investing as early as possible and always - unless there are substantial and compelling reasons not to do so - re-invest any dividends that may accrue to you.
Add to your positions on a constant basis. By doing so you will benefit from what we call ‘rand-cost-averaging’. How does this work? Say you want to invest R2 000 per month. The first month that buys you (say) 1 000 units of a particular equity unit trust (R2 per unit). The next month, where the markets have gone up, you may get only 909 units for the same sum and the following month you may now get 1010 units. Now you own 2919 units and have paid R6 000 at an average price of R2.06 per unit, which is better than you would have done had you deployed the entire R6,000 when the unit price was R2.20, but worse than a price of R2.00. This is the rand-cost-average price of the units. This approach is excellent for people who have monthly amounts to invest, or wish to phase a large lump sum into the market.
“If you do invest a lump sum, you will need to remind yourself that you are in it for the long-term and that, even though the price (value) of your investment may initially decline, given enough time you will prevail,” he says.
Another approach could be to make use of the “constant rand method”, in which you keep the initial investment amount constant, withdrawing the gains and adding money if losses occur. This rebalancing could be done every six or 12 months. We are not particularly fond of this method as it tends to negate the effect of compounding by withdrawing profits or dividends, although it might be suitable for investors with a shorter time horizon.”
Every bubble has a burst. Avoid them where possible and rather leave your investment decisions to the professionals who spend their entire days (and often nights) watching the markets. Creating wealth requires time, patience and a plan. Therefore, over the long-term, the level of the JSE from one week to the next is of very little relevance to the true investor.
 

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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