Stock markets do not keep going up and up. History has shown that stock markets go up most of the time, but when corrections occur, share prices go down, sometimes dramatically. This is as inevitable as the seasons of the year and just as necessary. We are able to predict the changes in seasons with a fair degree of accuracy but no-one has ever been able to consistently predict when market corrections will take place. According to well-known investor and fund manager Peter Lynch, far more money has been lost by investors trying to anticipate corrections in the market than in the corrections themselves.
Despite the occurrence of normal downturns in the market, having shares or equities in your investment portfolio will provide you with the potential to grow your wealth at a far greater rate than inflation over time. Although it is never pleasant to see the value of part of your investment portfolio reducing, you need to accept the fact that corrections do occur and they tend to occur almost every year. Most corrections are reasonably small and short-lived, but every so often there is a profound correction, which is referred to as a bear market. Over the past 115 years, we have seen around 34 of these bear market situations, each lasting from just over a month to around two years in duration. When a bear market ends, the subsequent recovery tends to be quick, normally taking people by surprise and patient investors not only recover their losses but usually enjoy substantial gains. To quote the investment guru Warren Buffet, “The stock market is a device for transferring money from the impatient to the patient.”
Only a small number of corrections turn into full-blown bear markets; this means that most corrections are merely a break in an upward-trending market. During a bear market, the worst thing to do is to panic. One way to guarantee losing money is to sell investments when their value is low, ‘hide’ in so-called safe assets such as cash, then plan to re-enter the market once share-prices start increasing in value. Seasoned investors view bear markets as buying opportunities. Another famous investor, Sir John Templeton, said, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell. If you want to have a better performance than the crowd, you must do things differently from the crowd.”
A sensible investment strategy is to invest in a diversified portfolio of funds which incorporates asset classes such as equities, bonds, cash, and property. When one asset class experiences a correction, the performance of the portfolio is often boosted by good performance in another area. Most investment portfolios should have a healthy exposure to shares or equities and you should always allow this component of the investment enough time to outperform inflation. Equities have always outperformed all other asset classes over meaningful periods of time. Instead of trying to time the market, you should rather spend more time in the market.
Rands and Sense is a monthly column, written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth.
His Financial Planning Office number is 046 622 2891