Evidence overwhelmingly shows that, more often than not, those who invest and forget about their investments until they need them (whom we might call ‘lazy investors’) will achieve better investment outcomes than those who actively try to time the markets (whom we might refer to as ‘traders’) – Behaviour Gap.
Being a ‘lazy investor’ generally delivers better outcomes but, more importantly, the sooner you start the better. Doing so allows you to have more certainty on your investment outcomes and be better prepared to focus on the things you can control, namely:
· time in the market
· enjoying the benefits of rand cost averaging
· having appropriate asset allocation in your holdings, and
· having a well-defined plan for cash flow management.
Focusing on the aspects that you can control vastly improves the rate of success in achieving the desired financial outcome. Delaying investing until later in life frequently leads investors to focus on those things over which they (and their financial planners) have less control, including:
· looking for creative ways to generate more disposable income and capital to invest
· timing the market, and
· investing in riskier investment strategies – in both well-regulated investments and those that are questionable (such as cryptocurrencies, syndication schemes etc.).
Investing later in life also results in investors being increasingly driven by irrational emotions, as they tend to get out of the markets when prices are irrationally low, thus permanently locking in capital losses that could have been recovered had they remained invested over an appropriate investment horizon.
Market uncertainty is the only constant that one can count on, and market noise serves only to heighten investors’ fears, causing them to refrain from investing.
But extrapolating past market performance into the future as a basis for decision-making, is dangerous. After the sell-off in the first five months of 2022, especially in US stock markets (which were down for eight consecutive weeks), it is easy to extrapolate and claim that market returns will be lower than the average for the next decade, after the phenomenal decade from 2010 to 2019. It is, in fact, not necessarily true that the US stock market had outstanding returns for this decade. Out of the last nine decades prior to 2019, investors in the S&P 500 would have experienced only the fourth-best decade out of these nine (Morningstar). This illustrates that it is much better to have time in the market than trying to time the market, so make sure that you have adequate cash flow management to invest appropriately across the various asset classes in your portfolio.
Furthermore, by investing during uncertain times and using rand cost averaging (investing smaller sums over a period of time to buy into the market at various prices rather than investing a lump sum at a single point in time), one is able to buy depressed assets earlier and, if they stay cheaper for longer, then more assets can be purchased at lower prices. Having a clear understanding of your investment time horizon and the period required to achieve the expected returns from the asset classes you are invested in, will enable you to afford investing in times of uncertainty.
The example below is called the ‘funnel of doubt’ for equity investments. It shows that in order to have high confidence of constantly achieving the expected inflation-beating returns of equities, you need to have time on your side.
In the short term, one should expect growth assets to underperform at times. However, over longer periods, the inflation-beating returns of equities cannot be ignored. In the graph below, this concept is explained in the return profile of the PSG Wealth Creator Fund of Funds (a local equity unit trust) since inception.
PSG Wealth Creator FoF: Distribution of historical rolling returns
Source: PSG Wealth research team, Data as at 31 May 2022
Investing with an appropriate investment horizon (so that you don’t need to withdraw your invested assets) is key to mitigating risks. To mitigate the risk of volatility related to asset class choice and investment strategy, it is crucial to have a robust cash flow management plan tailored to your own investment needs. The graph above also depicts the time horizon required to achieve certainty around the expected returns of equities. Cash flow management accounts for the time horizon of riskier assets (in the short term), balanced by requirements around immediate income, emergency expenses, and other more interim capital needs that need to be planned for. This ensures a more robust financial plan where savings can be invested in growth assets aligned with appropriate time horizons.
A qualified and competent financial planner will analyse your individual needs and aspirations, and taking the above factors into account, co-craft a robust plan with you to help you achieve your financial goals. Although the best time to start was yesterday, the second-best time is today.