By: Reyneke Van Wyk
Risk of not being invested far outweighs being invested during weaker markets
It is important for long-term investors to participate in market rallies. The problem is they are very difficult to predict. By phasing-in capital at regular intervals, investors can participate more consistently in market rallies, according to Reyneke van Wyk, Stonehage Fleming’s Head of Investment Management, South Africa. “Over the years, experience has shown us it is more effective to invest according to a scheduled plan, consistently feeding funds into the market at regular intervals, typically every two or four weeks,” he says.
When global equities surged by 4-9% in the days following the US presidential election it highlighted the importance of being invested in the market. “The subsequent news of an effective vaccine further boosted market sentiment and supported the rally. Those who were too conservative going into the election paid the price,” says Reyneke.
The fact is there are too many risks associated with trying to predict or ‘time’ the market he explains. “During a rally, it is tempting to wait before continuing to invest in the hope that something will happen to make markets drop and allow you to participate at lower levels, ready to ride the next wave. However, with equity markets growing over time, the risks for long-term investors of not being invested far outweigh the risk of being invested during weaker markets. Research shows that by missing the best ten days in the equity market over a 20+ year investment period, the annualised performance reduces by over 40%*. The best and worst days are also often clustered together during volatile periods.”
By following a disciplined process to phase into equities, says Reyneke, investors can reduce the timing risk, especially when investing from the position of 100% cash. “Typically, the objective would be to invest the portfolio fully within six months, starting with a third and adding at regular intervals.”
Discretion should be exercised, says Reyneke. If the market is volatile, the capital deployment can be adjusted accordingly while maintaining that regular flow. “If the market enjoys a good couple of weeks you might phase in a bit less, if it has a poor couple of weeks you could phase in a bit more,” he says. “Don’t try to be too clever with timing the market. Stay focused on the long term.”
*JP Morgan Asset Management & Strategas Securities
Reyneke van Wyk is a Partner and Head of Stonehage Fleming’s Investment Division in South Africa. He looks after the investment portfolios of a number of our family clients with substantial international wealth and chairs several family councils.
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