Investors, now is the worst time to exit your portfolio. This is the clear message from the Association for Savings and Investment SA (Asisa) after global markets took a massive dive and life as we know it changed in response to the coronavirus pandemic.

Crashes are common, but so are recoveries, and despite Covid-19, fear-driven decisions will not deliver the outcomes you’re hoping for, financial experts warn.

“We should expect a market crash every six years,” says Wynand Gouws, a certified financial planner at Gradidge Mahura, in a newsletter to clients.

A market crash or bear market is defined as a market correction where the market falls by more than 20% from its previous high, Gouws says. The biggest stock market in the world, the US, has experienced 16 bear markets since 1926, averaging one bear market or correction every six years. “The average of these market losses has been 39%,” he says.

When markets crash and bad news is the order of the day, it’s natural for investors to panic. While you may feel like you desperately need to do something about moving your investments out of the market to stop the losses, it is often the worst thing to do.

If you switch out of your unit trust portfolios now you effectively materialise what have been paper losses thus far, Leon Campher, CEO of the Association for Savings and Investment SA (Asisa), says.

This is the first time that a new generation of unit trust investors are experiencing extreme market volatility, he says, considering that the last significant market crash was 11 years ago.

It’s time in the market that gets you the returns you want and not timing the market, Campher says.

Campher says in a media release that the pain felt by many investors who have seen the value of their investments decline in recent weeks is likely to be compounded by the emotional stress presented by the Covid-19 pandemic.

However, emotional reactions rarely lead to prudent investment decisions. “Just as Wall Street halts trading for 15 minutes to force traders to catch their breath and consider their investment decisions, when indices drop by more than 7%, individual investors should reflect on the situation before taking decisions,” Campher says. 

Any decisions at this time should preferably be made with the help of a qualified financial adviser, he says.

“The market volatility has been extreme and the roller-coaster ride may continue for some time, but if you switch out of your unit trust portfolios now, you effectively materialise what have been paper losses thus far,” he says.

In a newsletter to investors, Satrix says that more money is lost by investors switching out of funds than by the markets themselves when prices fall. “This is because more often than not investors sell out of a fund at the wrong time and then miss out on the subsequent recovery in prices. The most important aspect of investing is sticking to your own long-term financial plan and to keep on investing.”

After the storm, the high

While volatility is part and parcel of investing in unit trust portfolios that hold shares, Campher says you must remember that financial markets have historically not only recovered their losses after every crash, but have also reached new highs. The 2008 financial crisis presents some good lessons for investors who are considering switching out of their unit trust portfolios into cash, he says.

“In reaction to global market turmoil caused by the financial crisis late in 2008, individual investors switched out of unit trusts with high exposure to equities (shares) and parked the bulk of their money in money-market portfolios. While institutional investors moved back into equities during the second quarter of 2009, many individual investors remained in money-market portfolios.”

Campher says as a result, most individual investors did not participate in the 37.5% growth achieved by the FTSE/JSE All Share index (Alsi) from its lows in early March 2009 to the end of September 2009. “Not only did these investors lock in their losses when they switched out of unit trust portfolios with equity exposure in the panic that ensued in the last quarter of 2008, but they also missed out on the recovery and the additional growth.”

On May 22 2008, the Alsi reached a new record high of 33,232.00 points. By March 3 2009, it had fallen to 18,120.69 points as a result of investor panic, fueled by the financial crisis. Campher says investors who stayed in the market saw the Alsi climb back to 24,910.85 points by the end of September 2009, regaining 37.5% of its value.

By January 17 2012, just more than two years later, the Alsi had surpassed its previous record high of 33,232.00 to close at 33,424.73.

Getting it right

Gradidge Mahura’s Gouws says there is lots of research proving how investors get it wrong when they try to move out of a falling market and back in later.

Vanguard, one of the world’s largest asset managers, concluded from its research that even moving out of the market for a few days reduces your probability of being able to earn a return better than a benchmark that tracks the market to below 50%. Your chances reduce rapidly from there the more days you are out the market.

Gouws says investors should adhere to the following principles in times such as these:

• Stick to your plan

Your financial plan should be developed to consider your personal objectives and your risk profile. It’s important to review your plan to ensure this still aligns to your objectives.

However, be wary of changing your “money personality” due to the noise and the crisis.

Your risk profile — the risk you should and can afford to take to meet your goals — should remain intact during both bull and bear markets.

• Let the professional money managers do their job

A diversified investment portfolio should include several investment managers and investment mandates aligned to your risk profile, Gouws says.

The investment managers will align the underlying portfolio to the current market conditions and increase or decrease the equity exposure within the parameters of their mandates to manage your portfolio and risk on your behalf.

• Now is the time to be frugal

If you don’t have an emergency fund, cut back on luxuries and build up a buffer or emergency fund. Given the continued uncertainty, diligently manage expenses and increase your contributions to your emergency fund. Be conservative with your finances. Don’t over-extend yourself during times of uncertainty.