The Winds of Change

The Winds of Change

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We’ve seen it before — world markets are affected by political change and major events. However, history always shows how markets bounce back and a short time later are in fact stronger than before. Since 1940 there have been 12 major market drops due to some world crisis.

The average loss taken over these 12 bear markets was 32,6% — granted, a bitter pill to swallow — however, if you had panicked and exited the market, then you would have missed out on the recovery averaging 34,1% in one year, 49,7% in three years and 75,5% in five years. That would definitely have been a bitterer pill to swallow.

Choose your own strategy

Market psychology and behaviour definitely need to change. First and foremost, stop following the herd. If you have clearly defined your investment strategy, as well as your risk profile and tolerance, then forget about what everyone else is doing.

When determining your investment strategy, also take into account whether you require growth or income from your capital. Only once this has all been decided, can you decide on your asset allocation.

The most important part of the exercise is to educate yourself. I am not suggesting that you become an expert in all fields of investment, but it is critical that you understand what is being presented to you in developing your diversified investment plan.

It is short-term thinking that results in the average investor’s portfolio underperforming. A long-term investor looking for growth should realise that coupled to this is their time in the market, which, because of inflation and worldwide trends, should — in my opinion — be no less than eight to ten years. It is only over a period as long as that that the sharp fluctuations that can and will take place will be ironed out.

 

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Long-term rewards

The real art of investing (other than asset diversification) is to identify value well before other investors and be patient. This in turn will bring rewards over the long term. The message I am trying to get across is that if you are in the market — and most people are in one way or another without realising it (through retirement savings, work pension plans and so on) — if ever there was a time to sit tight, it is now.

Change is, however, inevitable and the unexpected will always require re-evaluation of your strategies. This may seem contrary to the fact that I speak about sitting tight in this particular article.

If your investment portfolio calls for changes because it needs to be rebalanced in line with your strategy, then by all means go ahead. However, don’t make changes to your investments simply because of what is reported in the media.

Patience pays dividends

I like to think of the situation as a possible change in season. In winter, we cannot wait for summer, but we have to be patient. I understand that when you make an investment you want to buy at the right time and see a profit appear right away.

Few investors can tell of this success. What you need to do is to try to identify undervalued assets and make an investment with a clear understanding of its long-term nature.

Then you need to be patient and understand that there are many external factors that will affect your investments, most of which are generally beyond your control. Any successful investor will tell you that the most important lesson they learnt from their successors — and they will all agree — is that patience is number one.

Bryan Hirsch
BRYAN HIRSCH has been in the financial services industry for 47 years and is a director of Bryan Hirsch Colley & Associates. He has written two books, the first Bryan Hirsch’s Guide to Personal Finance and more recently, Steps to Financial Freedom. Bryan has written for many of South Africa’s top financial and business publications, has been a weekly guest on Radio SAFM for 18 years, and has his own weekly TV show You & Your Money on Summit TV.