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But that's normal after the recent windfall, writes Isaac Moledi

By unknown | Sep 11, 2007 | COMMENTS [ 0 ]

Isaac Moledi

Isaac Moledi

The old Lenny Kravitz song, It ain't over 'til it's over, is true of the stock markets.

We have seen a massive increase in market volatility and in spite of the big falls that we have seen over the past few weeks, the market has rushed back up again, seemingly ignoring the reasons that caused it to fall in the first place.

Right now, the JSE All Share Index is not that far from previous record highs and it seems that whatever it was that caused the blip has all but been forgotten or ignored.

This sudden bout of volatility, though, has caused a lot of people to look at their portfolios anew, but it is nothing new, says financial expert Gregg Sneddon.

He says the latest round of market volatility can provide us with at least three important lessons to remember:

l That market volatility is nothing new. All that has happened is that the last four years of consistently exceptional returns have lulled us into a complete sense of complacency about investing.

We have come to believe that things go up indefinitely and have forgotten that equities are the most volatile asset class, especially in the short-term.

We have also forgotten what "long-term" actually means when it comes to investing.

Equity investments require time, and six months or even one year is not "time", says Sneddon.

He says the lesson to remember is, if you want equity returns, you need to expect, and to be able to deal with volatility.

Statistically, when investing in shares, there is a one in four probability of a negative return in any one year.

Sneddon says that if the volatility is affecting your sleep at night, you probably have too much equity exposure, or you need a really good coach who can help you through the turbulence.

l There are three kinds of stock market animals: bulls, bears and pigs. And as the saying goes, "Bulls make money, even bears make money, but pigs get slaughtered."

Sneddon says that many people have too much equity exposure and many have been holding on for just a little bit longer.

He says market fluctuations such as we had recently are a good reminder to people to re-balance their portfolios.

If your strategy is to have 50percent in equities and the market growth has increased this to 55percent, or 60percent, this, according to Sneddon, might be the time to cut it back to 50percent.

You should avoid being a pig and lock in your profits. In the same way, if your time horizon has changed and you are no longer able to invest for the long term then it is also probably time to reduce your equity exposure.

He sees cash yields as attractive - currently about 3,5percent above inflation with no capital risk. In addition, yields might be more attractive if the prospect of another interest rate increase later in the year are true.

l "It ain't over 'til it's over". Sneddon says volatility has increased and markets will probably be very volatile for quite a while still.

This is largely because markets don't like uncertainty and, as Sneddon says, right now there is still a lot of uncertainty over things such as the sub-prime debt market in the US.

As a result Sneddon says, we should expect that things are going to be rocky for a while still.

His advice is: if you have invested for the past four years, you have had fantastic returns.

Similarly, if you missed the past four years, Sneddon's opinion is that now is not the time to be piling into the market. Rather be cautious and patient and phase your funds in over a period of months to help iron out some of the volatility.

Also give some serious thought to investing funds offshore. The local market is still more expensive than most of the developed markets and the rand is still strong (remember we were at R14 to the US dollar and R20 to the British pound at one stage).


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