Over the past two weeks, investors have been on a President Jacob Zuma-fuelled roller coaster ride as market valuations and currencies reacted to the political and economic fallout of the Cabinet reshuffle.
What everyone is trying to figure out is what this means for the markets, but this will be hard to do.
While we have some idea of the direction our currency and markets (banking stocks in particular) will take based on different scenarios, no one knows what those outcomes will be.
It is not surprising that financial advisers have been inundated with queries from clients about switching into cash.
In all this uncertainty, it may be tempting just to opt for cash and wait for the chaos to subside, but is that a good long-term decision?
Last week, investment house Glacier by Sanlam held a presentation for its clients and advisers about how to manage these turbulent times.
What it concluded was that while no one could be certain about what markets would do in future, or what returns would be like for equities and bonds, what we can be sure of is that volatility is here to stay and the markets will remain volatile.
So, should you take an antinausea tablet and stay invested – hanging on during the ups and downs – or should you rather play it safe, switch to cash and have a better night’s sleep?
If you are tempted by the latter, Glacier recommends that you first consider the fact that cash diminishes an investor’s purchasing power after taxes and inflation because it is not particularly tax efficient, and interest rates do not sufficiently provide for real inflation.
If, based on the above, you accept that you cannot sit on cash forever, you effectively need to decide to time the market.
This means moving in and out of investments based on your market return predictions. Not only do you have to make the correct decision about when to switch into cash, but you also need to make the right decision about when to go back into the markets.
The problem is that we are notoriously bad at getting this prediction correct.
Even if you get out of the market at the right time, you will most likely miss the market recovery.
Glacier by Sanlam did some research on market timing based on R100 000 invested over 20 years.
If you left the money invested through all the market ups and downs, including the market crashes of 1998, 2003 and 2008/09, your money would be worth R1.4 million today.
If you had tried to time the market and missed just five of the best-performing days in that 20-year period, your total return falls to a little more than R1 million.
If you missed the 10 top-performing days out of the 7 300 days, your return halves to R774 000.
So, ask yourself this: When you switch out to cash, how do you know you won’t miss some of those crucial market recovery days where the bulk of the returns will be made?
As Glacier concluded in its presentation, a crystal ball would be a wonderful thing – the problem is that it is impossible to consistently predict when those good or bad days will happen and, even if you miss just a few of those days, it will affect your overall return.
WHY EQUITIES ARE REALLY KING
In the past 15 years, there was only one year where cash beat both equities and bonds – 2015. Is that likely to be repeated again soon?
Over the same time period, equities outperformed both cash and bonds on 10 occasions, and bonds have outperformed equities and cash on five occasions.
Overall, however, a pure equity investment would still have delivered the best average return of 19.92%, compared with 10.32% for bonds and 8.12% for cash.
If you are a long-term investor but nervous of extreme volatility, opt for a balanced fund that invests in both equities and bonds rather than trying to time the market.
The equities will give you the potential for a higher return, while the bonds will lower the fund volatility and still outperform cash and, therefore, inflation.