Nobody can accurately predict when markets will hit bottom and when sustained recovery will start, and this unpredictability makes it crucial that investors don’t do anything extreme and lose sight of long-term goals, says Michael King, Africa director of Franklin Templeton Investments.
“An investor, or their fund manager, should rather adhere to a disciplined research and analysis approach, making active management decisions based on a disciplined fundamentals-based view.
“During a short-term setback, it is key for fund managers to remind clients not to lose sight of their long-term goals. Markets will always go up and down, and to access the benefits of equity investing requires patience through these periods of volatility,” he says.
He adds that nobody can accurately predict which asset class will be first to re-emerge when markets recover and which others will follow suit, but when this does happen a diversified portfolio across a range of suitable fund styles and geographies can leave investors well positioned to access these gains.
King says that the broad-based pullback in markets has affected nearly every asset class, and the recent performance of funds or collective investment schemes across the board have been caught up in these events.
“Even if the $700-billion bailout package put forward by the United States government succeeds in taking ‘toxic’ subprime debt out of the markets, it will be some time before credit markets and liquidity conditions normalise and, in turn, spur economic growth,” he says.
The next question investors should be asking is: What happens now?
King says it is worth noting that historically, equity markets have started bouncing back before the beginning of the broader economic recovery, rather than after.
“Take the Dow Jones Industrial Average as an example. Since 1929, this benchmark has returned close to 37% on average in the one year after the end of a bear market. The important investment lesson here is that stock markets are discounting mechanisms — they discount the bad news and look forward to better times ahead.”
Many investors will be considering whether they should be exiting the stock markets after experiencing double-digit losses in such a short time. Their dilemma is whether it is going to get worse, or whether the markets have bottomed.
These questions relate to timing the markets, which means getting it right on two occasions — when to get out, and when to get back in.
“Remember the dot-com bubble of the late 1990s, when the US was seemingly the only place to be invested, particularly the technology sector? We know what eventually happened to dot-com stocks and investors of the time probably wished they had more ‘boring’ equities in their portfolios to cushion their losses,” King says.
“It’s important to remember that historically, bear markets do not end on good news; they end on bad news, and the news of late has been pretty bad. Of the last six bull markets going back 30 years, the average overall return was 140% and those markets started in environments just like today.”
King says that at times like these, is it most relevant to revisit the words of one of Franklin Templeton’s founding visionaries, the late Sir John Templeton. “One of his most famous tenets was that ‘the time to invest in the markets is at a point of maximum pessimism’.” — I-Net Bridge