Stop timing the market

Nowadays, we hear a lot of people say they are finished with equities and are going to convert everything into cash. A few years ago, when equity markets gave us double-digit returns, we heard a lot of people say they were going to take all their cash – and borrow some money – to buy more shares.

When the rand traded at R7,50/$ in 2012 a lot of people wanted to bring all their international investments back to South Africa because they believed the rand would strengthen to R6/$. Then in 2016 when the rand traded at R15,87/$ everybody wanted to take all their money offshore. All of these emotional decisions would have been wrong. There is no way anybody can be sure what will happen in the future and that is why there are two very basic investment principles that can be followed to avoid disastrous decisions:

  1. Diversify: Even the best company can go bankrupt, the safest bank account can be defrauded and the best property can fall out of favour. Never be so greedy or so fearful that you take a single investment bet.
  2. Re-balance your investments: Don’t assume that your investments will always go up, or that they will always go down.

To elaborate a bit on the second point we can look at a true-life example. At the beginning of 2009, just after the global financial crisis, a lot of people were 100% sure that share prices would never recover and sold everything they had, locking in the 47% loss. Not all shares were affected to the same extent, but general mining shares like Anglo American took a 71% knock. This should have been seen as a buying opportunity because the valuations said so, and although the price could have dropped more, following a cautious buying plan would have resulted in a 123% increase over the next 2 years. During that spectacular rise in the share price it would have been prudent to take some profit every now and then because we never know when a trend will end.

And then in March 2011, the share started a 5-year decline of 68% to end at R114 per share in March 2016. Once again valuations showed that the share was cheap but everybody said the time for commodities were over because of the China slowdown, so they sold their shares. That should once again have been a cautious buying time and today, 3 years later, the share is up 203%. So perhaps taking some profit is a good idea?

By the way, the JSE Top 40 is up 183% (18% p.a.) over the past 10 years, but only 13% (2,6% p.a.) over the past 5 years. Perhaps the next rise is imminent for SA shares?

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