Ignore the siren calls — stick to your investment plan
Long-term investors know they will face times when markets are down and they should prepare
Tie yourself to the mast: the market sirens are singing, hoping to lure you away from your investment voyage, investment specialists say. At Morningstar's recent annual conference, Dan Kemp, the data provider and investment manager's chief investment officer for Europe, said the headlines we read or listen to about market performance are like the luring songs of heavenly winged sirens intent on tempting Odysseus to abandon his voyage in Homer's epic Greek poem The Odyssey.
Headlines like "JSE nears worst month performance in 10 years" and "World stocks head for worst losing streak in more than five years" are enough to unnerve even experienced investors.
But Kemp says long-term investors know they will face times when markets are down and they should prepare, like Odysseus.
Odysseus put wax in his crews' ears so they could not listen to the songs as they navigated past the island where the sirens lived. But, wanting to hear their song himself, Odysseus had his crew tie him to the mast and promise not to release him despite any pleas to the contrary.
Kemp says we all have two decision-making systems - one is quick thinking and quick acting and can save your life when you cross a busy road. The other is slow, logical and thoughtful and it is this system you should use when you make decisions about your investments.
Focus on long-term trends
You may want to hear the market noise, so you know what is going on, but your investment decisions should be made in a quiet place away from the noise and with reference to investment principles that are guiding you - like a sailor's chart.
As a long-term investor you are investing over decades — "who cares what is happening second by second", Kemp says. Stay focused on the long-term trendsmarkets have dips — sometimes severe ones — but the long-term trend is up. Build new habits that force you to use your logical long-term thinking and rethink the way you visualise the markets, Kemp suggests.
A good way to tie yourself to the mast is to have a check list for your investment decisions, Kemp says.
When it comes to rethinking information about the markets you could try out 10X Investments' suggestion to view any fall as a sale on shares. It posted on LinkedIn a spoof of a leading financial newspaper with the headline, "Investors celebrate as stocks go on sale", saying it was one you will never see.
Steven Nathan, the CEO of 10X, says as investors we tend to feel happiest when the market is buoyant. When prices fall, so do our spirits, but unless you need your investments in the short term you can lift your spirits in this way: view the market lows as the times when you can buy a bigger slice of the market with new investments, recurring investments or reinvestment of your returns.
Periods of low returns, such as we are seeing now, always cause concern, Nathan says, but the biggest risk when markets do sell off is that you may panic and move your money out of the market. This is how value is destroyed for long-term investors, such as retirement savers, he says.
At times like this, remember the golden rule of investing: it's not about timing the market, but simply time in the market, Nathan says. Month by month your returns will be lumpy, but the average return should be positive.
The danger of trying to move out of the market when returns disappoint is that you have to get the timing out and back into the market right.
At the Morningstar conference, senior portfolio manager Victoria Reuvers highlighted just how hard that is. Morningstar's research shows that having been invested for 30 years, spanning 7,915 days, you could have earned 6.8% a year. But timing the market and missing the best 25 days out of those 7,915 would have cost you more than half your average returns — 3% a year instead of 6.8% for the 30-year period.
Reuvers also commented on the focus globally on costs, highlighting how net investments into index-tracking funds such as those managed by the world's biggest passive manager, Vanguard, are now equal to flows into the rest of the industry. Total investments in Vanguard now account for a quarter of investments in all fund managers in the US.
And over the past decade net investments into US managers with the costs in the lowest quintile — the bottom 20% when funds are ranked on cost — of all funds have exceeded flows into all other funds.
But South African investors have a blind spot when it comes to the costs their favourite fund managers charge.
Reuvers says one-third of the money local investors have invested in offshore funds approved by the regulator as good for South Africans is in funds managed by Allan Gray's offshore partner Orbis.
Though Orbis's flagship Global Equity Fund has done well delivering for investors just over 10% a year after fees over the past 10 years, it and other local manager favourites have a high price tag.
Reuvers didn't name the managers when she showed the costs of the favoured offshore funds managed by South African managers, but it wasn't hard to tell that the large South African/global manager with a 2.21%-a-year fee in her slides was Orbis.
The average fee in the sector was 1.46% — well above the 0.8% a leading passive manager is charging for its global equity fund and more than double the 0.69%-a-year fee of a global manager to which Morningstar has given a gold rating.
Reuvers did, however, note that discretionary investment managers like Morningstar, which choose investments for financial advisers' clients, were doing a better job at including global managers with lower fees and lower cost index-tracking investments than advisers who don't use discretionary investment managers.
Saving on costs is certain, whereas performance may be whimsical, but in choppy seas make sure the mast you are tied to is strong.