This Time is Different!

SARS has an excellent control mechanism in the IT14SD.
July 7, 2016
Forex Management
August 4, 2016

I recently read an article by Andrew Serwer fromFortune magazine that attempted to sum up the US market. I quote:

“That was a nasty patch the market went through this fall (Oct / Nov) huh? So was it just the bull pausing to catch his breath? Or was it a full-fledged, albeit quick time, bear market? Or was it something more insidious maybe a warning of a truly wicked maelstrom just over  the horizon? No one knows, of course. That’s what makes investing so terrifying-or exhilarating, depending how you look at it.”

Considering the MSCI World Index (world markets) fell by 13.9% between November 2015 and February 2016, the quote provided a fair account of recent economic events. However, this article was not written recently! In fact, it appeared in Fortune Magazine in February 1999. This was after we had entered a bear market in October 1998, only to recover by end January 1999. Often investors believe that the current market cycle is unique, I believe some elements may be cyclical.There were two major crashes on either side of 1998. There was Black Monday 19th October 1987 where markets had a major fall, only to recover to pre – crash levels by late January 1988. After Black Monday an army of economists believed the world was coming to an end because this time was different. It never turned out to be!

Then there was 9th October 2007 to 9th March 2009 during the global financial crisis. This was a 17-month bear market. Markets also recovered. According to Reinhart and Rogoff in their book titled “This Time is Different” they believe these four words have robbed investors of more money than a barrel of a gun. In their book they outline the role of debt in market cycles and help us understand why we always make the same mistakes. Rather than putting you through this rather laborious book there is wonderful video by Ray Dalio (a legendary fund manager) which simplifies how the economic machine works. It’s fun, and I urge you to view it on www.economicprinciples.org.It is amazing that during each market cycle’s rise and especially its fall we think this time is different. Funny thing is it seldom is. How often do we see clients during the bad times wanting to get out the market and either investing in capital guaranteed solutions delivering marginally more than cash, or sitting in cash itself. This is exactly the wrong time to buy low returning guaranteed funds that lock you in.

Currently in South Africa we are dealing with unique circumstances that are relevant to our time. This along with attempts of economic self-destruction by our Government have resulted in extra pain on top of the fall from grace of emerging markets. On the back of this many South Africans have become extremely negative about the prospects of South Africa and investing. However, there was an article by Dimira De Fotis in April 2016 suggesting emerging market corporate bonds are becoming an opportunity again. South Africa was among her pick of countries and Naspers is among her top 3 picks of corporate bonds. This illustrates that as South Africans we are sometimes too close to the action to see our significance in the global economy.

To illustrate this. How many of you heard a South African ‘good news’ story on your December break? Many have given immigration a thought or at least are taking some of their money offshore. No one wanted to invest in local markets, in fact most investors wanted to move to cash. Who would have thought the ALSI (SA Equity Market) would have run 16% in just 3 months from the 21st of January 2016 to 21st April 2016. Most fund managers were caught by surprise!

What I hope to achieve by this brief newsletter, as this topic is exhaustive, is that in a global context things are not that different this time. This means we should not over react and we should stick to the investment plan we have. As an investor who is fearful, you have the option of staying invested, trying to time the market (switch out and wait for market to go up again before getting back in) or moving into cash. Three years on from the crash of 1961-63 and 1987 the Investor who stayed invested outperformed both the switcher and the investor who baled into cash. It was only over the 1973 -74 crash that it took more than 5 years to outperform the switcher and the cash investor. If we look at the long term and we look at history it will show that staying invested has always been the smarter choice.

If an investor had moved out of the market and into cash in January this year they would have missed the 16% upswing in the ALSI in the 3 months to follow. Then on seeing an upswing if they were a switcher they may have reinvested. Not only would they have missed the 16% but they would have suffered some losses as the ALSI gave up 9% in the months to follow. Markets have been volatile recently, and global and local economic factors may result in that continuing for a while.

What we do know about markets is that there will always be market cycles and periods of volatility. To
sum up:

If this time is not that different what did the successful investors do right last time?

They focused on 3 things:

  • Stay invested (The switcher and cash investor has never won over any long term period)
  •  Make sure you’re diversified. Get good advice on how to do this – only having a local share portfolio is one asset class being SA equity and one manager your broker!
  •  Keep your costs down. Every percentage point you give away is a loss.

At Harbour we have saved clients 1.5% on average in fees a year. If you’re retired and drawing the recommended rate this equates to a 30% increase in your income. If you’re saving for retirement this will deliver and extra 30% on your investment over the next 20 years. So while the markets might be unpredictable there are things you can do to improve your situation in these volatile times. If you would like more information please contact your Wealth Planner or visit our website

www.harbourwealth.co.za

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)