Worst periods for investment returns are usually followed by the best

The performance of the local equity market has been rather sluggish over the past few years, with the FTSE/JSE all share index delivering some of its worst returns in more than 40 years. Poor returns usually make investors feel compelled to take drastic action — often incorrectly so.

While the JSE is posting some of the worst rolling five-year annualised returns in over 40 years, historical data suggests that the worst periods are usually followed by the best.

This is exactly the reason why sitting on your hands might prove to be the best course of action at the moment.

While poor returns on investments are a bitter pill to swallow for any investor, they are by no means an anomaly.

At this stage, it is more important to reflect on the subsequent returns the all share index generated after each of the previously so-called “worst return” periods.

The red circles on the graph below highlight the lowest rolling five-year annualised returns generated by the all share index since 1979.

The data also illustrates that these “severe” declines were historically always followed by a drastic upsurge in returns.

For example, after the market dropped in April 2003, subsequent returns jumped to as much as 41.09%.

After the all share index’s drop in March 1979, it also subsequently rose by about 15%.

On average, the all share index rose by more than 24% every time the market reported depressed returns over these five periods — exceptional returns that would easily have been lost had one given in to the urge to switch and invest elsewhere.

As such, market participants who remained invested at these levels were rewarded with attractive returns thereafter.

The aftermath of the 2008 global financial crisis provides an unrivalled case study for our premise that the periods of the worst investment returns are usually followed by the best.

Bloomberg reports that, from 2009, market participants saw a boom in equity markets, with investors generating returns as high as 20% in an environment where relatively cheap stocks were in abundance.

Our data also shows how investors received more than 16% returns in the subsequent three years following depressed returns during 2012.

Rewarding to brave the storm

If history is anything to go by, market participants who remained invested in equity markets amid the downturn of the 2008 global financial crisis can attest to how rewarding it is to brave the storm and to invest when everyone else is fearful.

We cannot deny that the South African investment landscape comes with its own set of challenges.

However, the market has acknowledged these trials and already priced in these risks to a large extent.

While the local bourse has delivered poor returns over the period in question, we would like to urge investors to remember that markets always run in cycles. And while it may be down now, it should eventually start rising.

Typically, the best investment periods are almost always preceded by the worst.

For more information, visit www.psg.co.za.

This article was paid for by PSG.