Investors repeatedly shoot themselves in the foot
By Andró Griessel
21 Sep 2019
In May 2014 I wrote an article named “Beware the rear-view mirror” in which I mentioned that it would be highly unlikely that we will see a repeat of the preceding decade’s remarkable returns and that it would be prudent to reduce your exposure to this asset class.
For context, please refer to the performance table of the four best general equity funds over a one, three, five- and ten-year period at that stage.
Over the preceding five years the average return from the JSE was 20.98% per annum compared to cash and income funds which delivered rather timid returns ranging between 5.72% and 7.71% per annum.
For anyone looking at this on face value, the allure of continuous high returns would have been very tempting, and the “obvious” choice would have been to take all your capital and plunge it into South African equity.
This past performance was the exact reason why I and other market commentators were warning people that this type of growth could not endure.
Remember, even trees that grow quickly, cannot reach the moon.
What did investors do with their capital at that time?
See below an analysis of the flow of capital in the second quarter of 2014:
In the subsequent five years until 30 June 2019 the asset classes referred to above produced the following returns:
So what are investors doing now?
Yes, you guessed it… They are rapidly selling out of relatively cheap South African equity after they have bought this asset class five years ago at a massive premium and they are now parking their capital in money market and income funds. See below graph as reference.
The second quarter of 2019 experienced almost exactly the opposite flow of capital compared to the second quarter of 2014.
Investments in equities experienced material net outflows whereas capital flowed almost exclusively into cash and income funds.
What does this tell us?
What must an investor do then?
By now you are probably thinking: “If you are such a clever cat, where must we invest then?” Unfortunately, the proverbial crystal ball does not exist, and we are left to our own devices when having to decide where the best place is to invest. In the same breath there is not one shoe that fits all feet, so general comments around where to invest would not only be reckless, but also inappropriate.
What I could say is this:
In closing, neither I nor anyone else can see into the future, but I would be very surprised if cash and income funds outperform South African equity over the next five years on a gross basis, not to even mention on an after-tax basis. It appears however that the investing public is (a) thinking that this will be the case or (b) that he or she will be able to re-enter the market at the perfect time.
With reference to the last-mentioned strategy, history suggests that the data is not supportive of this approach.
Andró Griessel is a certified financial planner and managing director of ProVérte Wealth & Risk Management. Contact him at firstname.lastname@example.org
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.
True to company culture, Samuel strives to build solid long term relationships with clients and has a meticulous way of identifying needs, defining goals and compiling an executable plan to reach one's goals. He firmly believes that one has to be a specialist in one's field to be able to add value, and continuous training & education is therefore paramount. To be objective and to have an independent approach to a client's planning is critical to make a difference.
Born & bred on a farm in the Montague region, Samuel matriculated in 2001 from Montague High School. He completed his BComm Honours degree in Business Management as well as his Postgraduate & Advanced Diploma in Financial Planning. Samuel is a CFP charter holder. Apart from a short stint at an agricultural company Samuel has spent his whole working career with ProVérte. Samuel is a shareholder and valuable member of the board of directors of ProVérte.