This weeks comment is from Angela Sale, CERTIFIED FINANCIAL PLANNER® at Southwood Financial Planning.
When we entered the lockdown period in March, 21 days felt doable and we were thrilled when our daughters decided to move back home for the duration (a decision based solely on their need to be close to our animals and not for moms cooking!) Thankfully we were all able to continue to work remotely so we each claimed a corner of our home for privacy and set up our work stations. We stocked up on food and wine, we planned a myriad of activities and hunkered down.
The lockdown requires us to place our trust in our government, who together with a team of experts, are making informed decisions for our physical and economic wellbeing and we were encouraged by our president’s swift handling of the crisis. But with the extension of the lockdown, and with no idea of how long this will carry on, or how much worse things will get before they get better, it’s hard to remain invested in the cause and not to feel disillusioned.
While it feels like time has passed slowly, it also is hard to believe that we are more than 60 days in. When we look back on this period, it will be the few magical days when we shared special moments together that will stand out in our memories. The lockdown has given us the unexpected gift of exclusive family time, and this is priceless!
When it comes to investing, as financial planners we ask our clients to embark on a similar process. We ask that they trust in our expertise to make decisions (in consultation with other experienced professionals) to put in place carefully constructed investment strategies to create wealth. We reiterate that life does not move in a straight line, that there are many kinks and curves along the way, and we ask that they trust in the process for a reward in the future.
Black swan events such as these can make it tempting to give up on these strategies. It is difficult to predict how long downturns in the market will last or how much worse things will get before they get better. However, the majority of the best stock market days throughout history have occurred during significant market downturns and it is these rare recovery days that add the most value to one’s portfolio.
The performance of your investment over the long term then depends on very small periods of time and missing out on these periods can dramatically lower overall returns. This is illustrated well in the table below compiled by Morningstar using the FTSE/JSE All Share Index as a proxy for the equity market:
If you invested R1 000 in 1995 and remained invested until 30 April 2020 (6622 trading days), your overall investment return would be 12,1%. But if you missed out on just the 25 best market days during this period, your overall return would be 6,5%. Missing the best 50 days lowers your overall return to 2,8%. And if you missed out on the 100 best performing days, you might as well not have been invested at all!
Creating wealth is all about getting started, making considered, rational decisions, taking calculated risks, and remaining disciplined and focussed.
Volatility in the equity markets make for a difficult journey. Patience remains key. It is important to trust in the process and not to get caught up in the madness of it all.