David Case, chartered accountant and director at Magwitch Securities, explains the importance of remaining consistent when investing.
Prudential Investment Managers use the slogan “consistency is the only currency that matters”, by which they are trying to say that doing the right thing over and over again will give you the best results. Too many investors want to invest only when times are good and avoid the market when times are tough.
Unfortunately, what invariably happens is that an investor will exit the market after share prices have fallen and return when there has been a period of sustained returns. These investors tend to capture most of the bad days and miss out on a number of good ones.
Stay put through the good and the bad
Between 2002 and 2018, the JSE All Share Total Return Index has grown from 958,17 to 7 946,48. This represents an annual return of 12,96 percent through a period that has included some of the most difficult times for investors, including the market downturn of 2002, the global financial crisis of 2008, and the past five years during which the stock market has been trending sideways.
During this period, the JSE All-share Index (ALSI) gained 60 percent of the time and declined 40 percent of the time. The scary thing for investors, though, is that if you invested over this period and missed just the five best months or 2,5 percent of the entire period, your return dropped to 9,44 percent per year.
If you missed the 10 best months or five percent of the entire period, you barely kept pace with inflation at a 6,66 percent annual return. The investor that sat tight throughout the period would have performed best. That is why many believe that time in the market is what counts in investing, and not timing the market.
Some real investments
One of the clients at Magwitch Securities has matured a policy that he has been paying for 40 years. His contribution was R30,50 per month with no inflationary escalation. To simplify, he contributed R366 every year over 10 years, which amounted to R3 660. Over the 40 years he therefore contributed R14 640. At maturity the policy was worth R1 million.
He was invested in an equity fund – the most risky asset class – for the entire period. During that time, we saw approximately four stock-market crashes (the last being in 2008). The average annual return he achieved was 15,37 percent. This return was all thanks to his consistency. He didn’t change his strategy each year.
Keep it consistent
The best way to invest is to make regular contributions and do it consistently. We often advise our clients to set up monthly debit orders so that the investment is always growing through the monthly contributions. One should also look at utilising tax-efficient products such as retirement annuities and tax-free savings accounts to take advantage of any tax allowance that may apply.
Very few people are fortunate enough to grow their wealth overnight. For the rest of us it takes discipline, hard work and consistency.