If you stayed invested in shares in the FTSE/JSE All Share index over 20 years to the end of 2017, you would have had a return of 16% a year. Picture: Katherine Muick-Mere
If you stayed invested in shares in the FTSE/JSE All Share index over 20 years to the end of 2017, you would have had a return of 16% a year. Picture: Katherine Muick-Mere

As an investor, there's not much that you can control. Having a plan and sticking to it are among the few things you can. Financial advisers will tell you that that is the best way to achieve your investment goals.

"Seldom has a year highlighted the importance of sticking to your long-term plan better than 2017," says Graham Tucker, the balanced fund portfolio manager at MacroSolutions and one of the main authors of the Long-term Perspectives report published annually by Old Mutual Investment Group.

Last year was a roller-coaster year for investors. In the middle of 2017, the most common question investors asked was: "Why bother investing when I can leave my money in the bank and get a better return?" This was after almost six months of the local equity market going neither up nor down. But then equities rallied in the second half and ended the year up 21%.

Many people missed out on this rally. Driven by the fear of losing money in a climate of uncertainty here and abroad, they chose to "sit on the sidelines" - they disinvested and held their cash. After the market rally, those investors were left wondering if it was too late to get back into the market.

It's common for returns to occur in short, sharp bursts, and the opportunity cost of missing out on these is very high, the Long-term Perspectives 2018 report says.

If you had invested in equities tracking the FTSE/JSE All Share index over the past 20 years and had stayed invested over the entire period, you would have had a return of 16% a year. "However, if you missed the best 10 days, your returns would be 12.6% a year. This may not appear to be much of a difference, but compounding over time is a powerful wealth generator - missing out on the top 10 days means you would end up with roughly half the money [after 20 years to the end of last year]."

Lessons in investing

What counts is time in the market, not "timing" the market. In other words, time is your friend. This is one of the seven lessons of long-term investing, according to the Long-Term Perspectives report.

"The main reason investors prefer cash to equities is the fear of losing money. But the best way to manage the risk of losing money is to remain invested in equities for longer."

As soon as your holding period is longer than five years, past performance shows that there is virtually no chance of losing money.

The report points out what happened after 2008: after a negative 30% return that year, the market rebounded to deliver 14% a year over the next five years.

Brendan Dunn, a financial planner at Verso Wealth, says one of the keys to successful investing is being informed on how to achieve long-term inflation-beating returns. "A lot of people are very short-sighted when it comes to investment returns."


21% 
The gain in equities in 2017


A well-informed investor is more likely to stick to an investment plan and less likely to make emotional or irrational decisions, like "chasing performance".

Research by Prudential Investment Managers shows that investors are inclined to chase last year's top-performing funds - and then pay dearly for it.

Prudential compared the impact of investing over a 10-year period to December 2016, starting in the balanced funds (in the Association for Savings and Investment South Africa's South African multiasset high-equity subcategory) with the best and the worst returns over the preceding three years and then switching each subsequent year to the fund that at year-end had the best or worst three-year track record.

It also considered what returns you would have earned if you had adopted a "buy-and-hold" strategy in the Prudential Balanced Fund for the full 10-year term to the end of 2016.

The research showed that you would have been worse off in the portfolio chasing the top performers and better off in the worst-performing fund portfolio. But you would have been significantly better off if you had adopted a "buy-and-hold" strategy and remained consistently invested in Prudential Balanced Fund for the full 10 years, Dunn says.

The Long-Term Perspectives report shows that the top-performing asset class has changed each year over the past 10 years, but investing in a mix of asset classes can deliver reliable inflation-beating returns.

The Old Mutual balanced fund index shows a return of 12.3% a year, or 5.8% a year after inflation, for the 88-year period from 1929 to 2016.

This index uses the relevant index for each asset class with the following weightings: local and global equities (45% and 20%); local and global bonds (20% and 5%); cash (7.5%); and gold (2.5%).

ardea@tisoblackstar.co.za

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