'Conservative strategy' that cost investor a fortune
Time in the market, not timing the market, is the investment advice offered by those in know.
In the latter case, investors attempt to call the right time to move in and out of the market or switch between asset classes.
That's what one investor, call him Jack Green, tried to do.
In August 2008, just before the market crash, Green withdrew his retirement savings from the living annuity in which he had invested and from which he was drawing a monthly pension.
He had been invested in a multi-asset or balanced unit trust fund exposed to equities, bonds, listed property and cash. He invested instead in a less-risky bond fund.
For the next six months, Green felt like a hero: as the global financial crisis took hold, the All Share index fell another 32%, dragging down the balanced fund in which he had been invested; it was nearly 18% down by February 2009. His new bond fund investment was up 8% over the same period.
At this point, Green's investment was worth R865,000.
Soon the effects of the financial crisis receded and market behaviour became more normal, but Green ignored his financial adviser's recommendation to invest back into a balanced fund.
Her advice was based on sound evidence that, as a long-term investor, you need a healthy exposure to equities to stay ahead of inflation. Green stubbornly stayed invested in a bond fund.
By the end of 2012, he learnt to his dismay that the balanced fund in which he had been invested was doing better than the bond fund he had chosen.
In fact, since deciding against taking his adviser's recommendation in February 2009 to reinvest in the balanced fund, the balanced fund had doubled. Had he followed her advice, his investment would have been worth R1.73-million.
His bond fund had appreciated by only 52% over the same period, and his portfolio was worth only R1.31-million.
Reviewing his investment decision in June this year, Green found that his conservative strategy had in fact been very expensive. Since February 2009, equities have returned in total 255% and the balanced fund in which he had been invested returned 184%, while his bond fund is up 94%.
Had he taken his adviser's advice, he would have had R2.45-million instead of the R1.67-million he now has.
Worse, to maintain his lifestyle and meet his expenses, Green needs to earn an annual return of CPI + 3%.
His investment decision has resulted in him earning returns below this and becoming poorer in real (inflation-adjusted) terms.
Timing the market is not just about getting out - you also have to time your getting back into it. Few get it right.
Staying in the market for both the ups and the downs can be more valuable.
Investment companies often quote numbers about the cost of missing the best days in the market. The latest for the South African market is from Investment Solutions.
It found that a R100 investment in a fund tracking the FTSE JSE All Share index would have grown to R1760 over the two decades between 1995 and 2014. If you missed the 10 best days, your investment would be worth only R965 - almost half that. If you missed the 60 best days, it would be worth just R143.