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Why diversification is imperative in long-term investing

Diversifying minimises risk – always!

Dear valued investor,

Source: Morningstar

The pain felt by loss, in reality, is experienced much more vividly compared to the pleasure felt from gains. Going through an economic crisis is not easy – for anybody. The uncertainty that comes with it – that we are all experiencing daily is difficult to manage. Not making any emotional decisions will be very important at this time. The graph below illustrates the very typical choices that are made in any uncertain/volatile time in the market – running to cash.

The three lines below refer to three different choices that were made in the crisis of 08/09:

  • Investor 1 remained in the market;
  • Investor 2 switched to cash during the crisis and switched back into the market as recovery was happening again; and
  • Investor 3 switched to cash.

The investor who remained in the market ended with a fund value of almost double the investor who switched to cash in this time. What is imperative to me here is to explain the utmost importance of long term investing again.

  • Don’t try to “time” the market – you will miss out on some of the best days! Investing R1 000 in 1995 up until March 16 2020 – mid-crisis. If you missed out on just 25 of the best days in this period, your fund value would have been half, compared to being invested for the entire term.

  • Diversify – moving to certain asset classes in times of uncertainty eliminates many excellent opportunities for you – and brings other risks to the table. Diversifying minimises risk – always!
  • A well-diversified portfolio, consisting out of cash, bonds, local and global equity exposure is key to long term success. Each asset class plays a different role in your portfolio – behaving differently in market cycles, and of course most importantly, in crises.
  • The graph below illustrates the calendar year return for different indexes from 2008 until 2020 – from the last crisis to the current.

This illustrates that diversifying asset classes is imperative. Timing the market will always fail as this cannot be predicted – and a long-term strategy is therefore important – but sticking to this strategy is where the success lies.

  • Ensure you have a strategy in place for your portfolio – investing aimlessly will lead to making the wrong decisions at the wrong time.
  • Speak to an independent advisor – having an advisor you can trust ensures that you don’t have your hand on the panic button during testing times, taking the emotion out of investing can ensure increased returns.

  • Lastly – remember to see the bigger picture! Investing is a long-term approach – and if you stick to the strategy and ride out the waves – a short term crisis in a lifetime of investing will only bring opportunities. Yes, this has been an extremely testing year for all of us, but the reality is that this will also not be the last crisis/global recession. We need to ensure we are diversified and protected against any possible risk.

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