Greetings all, unbelievably we are a third of the way through 2019 and the cold fronts have started to roll into the Fairest Cape. The general election held on the 8th of May seemed to be very peaceful and notable for a lower voter turn out and the increased support of the populist party, eg-EFF and Freedom Front. The governing party are thankful to Cyril Ramaphosa’s popularity for their reasonable showing and we look forward to Alan Winde making a difference in the Western Cape. Ramaphosa has a huge job in cleaning up the ANC and it will become clear when he announces his new cabinet whether he has the political backbone to begin the process of cleansing both the party and the state of rampant corruption. The latest addition to the Chalford Wealth team Daniel Esterhuyse has settled in nicely and has been mainly responsible for this newsletter, the first of our more informative bi-annual newsletters. In fact Daniel has been very busy and married my daughter Kendall on the 11th of May at venue near Greyton. It was indeed a perfect day.
The first quarter of 2019 was a perfect example in the vagaries of markets. Much of the economic outlook highlighted below is hedged on economic policies and government politicking. What we experienced in the 1st quarter of 2019 is a lesson often repeated throughout history – firstly, focusing on short-term “noise” leads to damaging investment decisions and secondly, it is impossible to time the market.
Multiple studies which track investment cash flows (investments & disinvestments from unit trusts) show how changes in economic and market conditions lead to cash flows that generally run counter to the eventual direction of the market. Essentially investors disinvest after multiple periods of underperformance expecting to reduce loss and wait for more favourable conditions when they believe markets are on the rise. We see time and time again that these investment decisions are extremely damaging to their portfolios.Figure 1: Average Equity Investor pays a penalty because of negative investor behaviour
Source: Chalford Wealth; Dalbar, Inc.
The last couple of years are testament to this fact, multiple years of underperformance have led to many clients questioning the need for exposure to growth assets, especially with only more bad news dominating our airwaves and bandwidth. From poor economic growth forecasts, Brexit, Trade Wars and economic policy uncertainty.
We at Chalford Wealth understand the need to coach investors through these periods and the importance of sticking to the long-term investment strategy. Without this guidance, especially for those investors that do not have long-term investment strategies, we see how investors capitulate and move into the haven of cash. Thereby, not only locking in loses but also missing market surges, ultimately doing irreparable damage to their investment portfolio.
2018 was another tough year for investors, concluding a grim 5 years of below inflation returns on the domestic front (JSE All-Share Index). The only positive we took from this was that, statistically, over the measurable history, this has only happened 20% of the time for all rolling 5-year periods, with those instances showing above average returns in the subsequent years.
Global equities also suffered a rout in the fourth quarter of 2018 (Q4 2018), as investors took fright over mounting evidence of slowing global growth. Other factors included anticipation of more detrimental impacts from rising US interest rates, a possible escalation in the US-China trade war, Brexit-inspired turmoil and increasing instability in the White House.
Those disciplined investors that stayed the course, were able to take heart in the first quarter of 2019 (Q1 2019) with losses of 2018 being reversed. Although slowing global economic growth is still a dominating factor, some of the negative factors that added to the 2018 retreat had eased. The main factors being the US Federal Reserve’s unexpected decision to stop raising interest rates, together with other developed market central banks implementing policies to bolster growth and the US-China trade negotiations, at that point, reportedly closer to being resolved. The more positive tilt to those factors led to a positive 12.5% return from the global developed markets (MSCI World Index) in US$ for the 1st quarter. Unfortunately, the Brexit deal has moved into more muddled space and Trump’s unpredictability continues to lend itself to a skittish market.
South African assets were boosted over the 1st quarter primarily by the easier global monetary outlook, posting gains across all asset classes, seemingly able to shrug off negative local sentiment. The domestic market (JSE All-Share Index) generated 8% positive return on Rands for the quarter. Largely buoyed by Rand-hedged companies which posted strong gains and the resource sector, which soared by almost 18% driving the index higher. “South African Inc” companies, specifically retailers, struggled to overcome the slow economy and generally performed poorly.
The prevailing headwinds to the domestic market are Eskom’s capacity to provide energy to the country, the negative impact of load shedding on growth in 2019, the land expropriation debate, the perceived interference of government through the nationalisation of SARB and the eagerly awaited May elections.
Irrational investor behaviour is typically triggered by some sort of stimulus including geo-political events, previous market experience, latest news or a hot tip from friends or colleagues.
Detrimental investment decisions that require some form of coaching:
Saving versus investing
Many clients believe saving is all that is required to ensure a successful transition into retirement. However, formal savings products, like the banking savings accounts and money market accounts, are seldom able to deliver the long-term real growth needed to beat inflation. Thus, putting the investor at risk of not keeping up with inflation and eroding the buying power of their accumulated wealth. Ultimately for retirement one needs to gain exposure to inflation beating assets through a diverse set of investment vehicles. Tax liabilities further erode the buying power of these savings vehicles.
Start investing too late
It’s never too early to start investing, in fact the earlier the better. The longer you let your investment work for you the more you will benefit from compounded growth. Time is your biggest ally.
We ran a simple example of two investment scenarios over a 40-year period to highlight the benefits of investing earlier:
Investor “A” (34 years old) contributes R1000 per month for 10 years, then stops contributions and holds the investment for another 30 years.
Investor “B” (34 years old) contributes zero for the first 10 years, but then contributes R1,000 per month for the next 30 years.
Assuming none of the investors withdraw from this investment and they generate a return of 10% per annum (Long-term inflation + 4% average), after the 40-year period Investor “A” has accumulated a significantly larger amount compared to Investor “B”.
Even if Investor “A” stops contributing after that 10-year period, the 10-year head start has meant it is impossible for Investor “B” to catch-up at his/her current level of contribution. The only way investor “B” will be able to match Investor A’s wealth at the end of the period is if Investor “B” contributes R1,699 per month for the 30-year period, that’s almost 70% more than “A”.Figure 2: Long-term benefits to starting your investment strategy sooner
Source: Chalford Wealth; Allan Gray
Not sticking to the strategy
A study done by the independent research firm, Dalbar, which has been following investor behaviour since 1994 has shown that on average Investors underperform the underlying investments, they are invested in. The underperformance is due to three main behavioural factors.
1) Chasing past performance
2) The switching of funds and
3) Trying to time the market.
As can be seen in figure 1, the underperformance over the 3-, 5-, and 10-year periods ending December 2018 is between 3-5%, this is the penalty or cost that investors pay because of those negative investor behaviours. It is therefore imperative to develop a strategy, trust in the process followed to develop the strategy and most importantly stay the course.Conclusion
What is abundantly clear is that investors are terrible at trying to time the market and those that stay the course have higher odds of achieving their long-term investment goals. To do this it is imperative to have a long-term strategy. Without a strategy in place, there is no framework guiding your investment process or implementation, and no yardstick by which to measure the success of these investments. Don’t wait to start investing, now is always the right time, but make sure it is guided by your investment strategy.