Apply a hands-off approach to the markets

2012-06-16 09:39

A study carried out by financial services company Acsis showed that on average investor returns are less than the after-costs return of the fund they are invested in.

The reason is market timing or at least the attempt to time the market.

When the market falls and losses have occurred, investors get nervous and cash in their money.

Then the market recovers and once everyone is feeling more comfortable they ­re-invest their money, usually at a higher price than they sold it for.

As a result over time investors’ potential returns are whittled away.

While the average fund in South Africa delivered a yearly return of 9.4%, the average investor only received 4.1% because they missed some of the market rallies.

The figures for the US are even worse where the average fund delivered 12.5% but investors experienced a -2.25% return!

This is probably because US investors are more “sophisticated” and therefore have a higher self-belief in their ability to time markets.

In contrast, the following story of an Old Mutual client demonstrates what could happen if you select a decent fund and leave the money to grow.

This retired client from Strand in Cape Town recently decided to move to a retirement village in the area.

While packing boxes, he came across an old investment certificate.

The client asked his adviser whether the investment was still active, and whether there was some money to help with the move.

In November 1968, the client invested R400 once-off in Old Mutual Investors’ Fund.

In order to keep pace with inflation, this investment would now need to be worth R22 000 to buy the same basket of goods as R400 would have bought in 1968.

So what do you think it was worth in 2012? A massive R340 000 – a growth rate of 16.8% a year.

This client had invested in equities, which is a growth asset, and then left it.

By “forgetting” about it the client protected himself against behavioural biases and reacting to market noise, he left the investment to grow without interference.

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