Andrew Bradley, chief executive of financial services group Acsis, has two clients who brilliantly demonstrate the power of investing in equities and timing the market.
They came to him at retirement. Although both worked for the same company and put away similar amounts into their retirement funds, one client had R9-million on retirement, the other R18-million.
Bradley says the difference was that the R18-million client had invested his money into equities and left it to grow. The other client had invested in more conservative asset classes and when he did invest in equities he tried to time the market. His fear halved his retirement potential.
With equity markets in turmoil, it is a good time to be reminded that when saving over a 20-year period, the performance of equities has been better than any other asset class.
Graham Ledbitter, senior portfolio manager at BoE Private Clients, says that, except in the case of countries afflicted by civil war or gross economic incompetence, equity markets should always outperform both inflation and cash over the longer term.
“The statistics show that over a period of 48 years ended December 31 2007, shares on the JSE generated a total return — capital plus interest — of 20% per annum compound, according to JP Morgan Equities Ltd. For the same period inflation was 8,6% per annum while cash, before tax, returned only 9,8% over the same period. Over a period of five years or more during this period, equity has outperformed both cash and inflation.”
Ledbitter says the reason for the relatively strong performance of equities lies in the need for all countries to grow their GDP in real terms over time.
“Virtually all countries need to have a growth strategy to prevent unemployment as populations grow. In simplistic terms, a growing GDP leads to growing profits for companies, resulting in growing dividends, which causes share prices to rise.”
But we do know that although stock markets enjoy solid returns over time, they do not move in a simple upward-sloping line.
Ledbitter says over the short term a stock-market index represents the collective wisdom, attitude and mood of all investors. As with individuals, moods and attitudes change.
Until recently, most major economies, including South Africa, were growing strongly. Corporate profits and dividends were good and stock markets, especially in South Africa, responded accordingly by generating strong returns.
Ledbitter says for a variety of reasons economies have started to falter and GDP growth has begun to slow drastically. Domestic issues in South Africa have also helped to sour the mood. The result has been a negative market performance accompanied by much volatility.
“When the stock market is in a bull phase, all good news is pounced on as an excuse to drive share prices higher; bad news just gets brushed off as irrelevant.
“Conversely, in bear markets bad news drives share prices lower and good news tends to be regarded as irrelevant,” says Ledbitter.
The current downturn in the market is only one of several economic “crises” over the past few decades. These include the major collapse of the rand following PW Botha’s infamous “Rubicon” speech and the global stock market collapse in 1987 when 38% was wiped off the JSE in a few days.
Negative sentiments also prevailed prior to the 1994 election when nervous investors believed that the ANC government might expropriate or nationalise property.
Ledbitter says similar sentiment prevailed during the emerging markets crisis of 1998 when certain governments defaulted on their debt and in 2001 after the Twin Towers terrorist attack in New York.
In each case when markets were in the middle of a crisis, many investors thought there was no way out. But in each case, the world didn’t end.
“Nor will it end now: problems will get sorted out, growth will resume and shares will start rising again”.