Is switching to cash the right move?

Paul Hutchinson of Ninety One looks at the outcomes experienced by investors who made different investment decisions prior to each of the last eight bear markets.

RYK VAN NIEKERK: Investors have a hypersensitivity to losses, and in times of extreme market volatility it leads to poor investment decisions. This is a concept known as loss aversion, and research shows people tend to fear loss twice as much as they would welcome an equivalent gain. Risk aversion often results in investors selling stocks in panic when markets fall, and then missing out as they recover. Paul Hutchinson, he’s a sales manager at Ninety One, is on the line. Paul, thank you so much for joining me. It seems such a simple and not a complex theory, but how often do we see risk aversion in practice?

PAUL HUTCHINSON: Thanks Ryk, and thank you for the opportunity.

Risk aversion, or loss aversion as you correctly point out, simply is the theory that investors feel the pain of loss more than the pleasure of gain. And if you take it back to when it was started, about 40 years ago two Israeli psychologists, Daniel Kahneman and Amos Tversky, came with trying to understand decision-making at times of uncertainty, at times of risk. And they developed this theory that really goes along the lines of the pleasure investors receive from incremental profits is less than the pain associated with incremental losses and, a bit like economics 101, diminishing marginal utility, where the marginal utility of the benefit from each additional unit decreases over time.

And it’s really this theory that we explore, and it’s this theory that plays out time and time again when markets correct and investors who had been invested in growth assets sell those growth assets, switch to cash and then at some point try and time the market and get back into the market.

And we’ve tried to understand, through the work that we’ve done, whether this was the correct strategy or the correct approach for them to follow.

RYK VAN NIEKERK: Of course it’s not the correct approach to follow. I think a lot of research has proven that, but how does that tie in with aggressive strategy versus a conservative investment strategy?

PAUL HUTCHINSON: So Ryk, I guess the quick starting point is the long-term financial plan that an investor has put in place; in understanding the financial needs analysis and the risk assessment that has been done at that point in time. They would have been guided to a more aggressive portfolio to meet their financial obligations and, if they’re extremely fortunate, a less aggressive one.

I think given the dismal savings rates in South Africa, most investors require a more aggressive approach in investing over a longer period of time and [thus] are more exposed to growth assets, primarily equities, and as a result have to see themselves through various bear markets. And they have been any number over the past 50 years.

In fact, our analysis shows nine bear markets, including the most recent as a result of Covid- 19, over the past 50 years.

And there’s a wealth of information in that if one tries to unpack and understand it.

RYK VAN NIEKERK: Let’s talk about that research. Of course, loss aversion is in many ways a theory. But do you actually, can you see it in the market and the fund movements in your research of those bear markets?

PAUL HUTCHINSON: Yes, absolutely. So Asisa, the Association for Savings and Investment South Africa, publishes quarterly flow statistics; so it flows into and out of various types of unit trust funds.

And if one goes back over the period for which we have this data – 2008, the global financial crisis, and prior to that, 2002, bubble – you can clearly see, at the point of the market correction or the market collapse, investors selling their growth assets, be it multi-asset high-equity funds or equity funds, selling those investments and investing the proceeds into the money market or short-term fixed-income funds. And in many instances, selling out of unit trusts in their entirety and going back to the bank account.

So the analysis of the flow statistics supports this investor behaviour, and we have no doubt that once Asisa releases the Q1 and Q2 flow statistics for this year, there will be some evidence of this behaviour being repeated once again.

RYK VAN NIEKERK: Is it only retail investors that are guilty or are there professional investors who also, you know, are guilty of loss aversion?

PAUL HUTCHINSON: I would imagine that it’s true for both types of investors. Certainly, our work has been focused on the retail investor. So we’re here to support financial advisors and the retail investor. That’s where we focused our energy and analysis.

RYK VAN NIEKERK: You’ve also researched possible scenarios to demonstrate the impact of loss aversion when you’ve turned conservative at the wrong time. Can you maybe take us through those examples?

PAUL HUTCHINSON: Absolutely. So what we try to do is we try to understand the bear and bull markets over the past 50 years. And perhaps some initial observation: bear markets tend to be deep, but importantly short. The shortest bear market over this period was the ’98 Russian debt crisis. It lasted only three months until there was a recovery. The longest was the first bear market, the first oil shock in 1971, which took two and a half years to recover.

But I think the most important observation is that the recovery from a bear market is often very swift, and anyone sitting on the sidelines is unlikely to benefit from that recovery.

So what we try to do is we try to analyse two [hypothetical] investors.

The one investor was able to not panic through the bear market and remain invested for the full period, whereas the other investor decided to sell their equity exposure at the bottom of the bear market and reinvest a year later when they saw that the market was starting to recover.

And I guess the key observation out of this research is that in every instance, and there were eight instances of bear markets over the past 50 years, the switch to cash was detrimental to that investor’s total investment return.

And what you’re actually seeing once again is the power of compound interest play out where we invest at R10 000 in each example. So in the longest example, over 15 years, the R10 000 grew to just over R15 million.

Now those are just numbers, but what it equates to is an annualised return of just under 16% versus one of just under 10%, and this 6% difference in annualised returns over 50 years results in 15 times more money at the end of the period. So – a material example of the benefit of compound interest over a very long period of time.

What’s interesting though is when we present this research, we get the question, or we get the argument, that 50 years is just too long an investment period. And we would try and counter by talking to the average person who starts work in their early 20s [and] retires 40 years later, so they’ve had a 40-year period where they’re trying to accumulate capital. And then in retirement, they’re likely to live for another 25 to 30 years.

So, for most people, their investment time horizon is materially longer than 50 years.

Quite interesting when one looks at investments through the life of an individual.

RYK VAN NIEKERK: Let’s take myself, I’m 45 years old. I have say 15 years left to contribute towards a retirement annuity or to save for retirement. And I looked at my statement every month over the past few months and I was really concerned about the capital erosion and I really, I feel I must do something to preserve the capital. Now what you’re saying is listen, sit on your hands, the market will sort out itself. That’s not an easy thing to do.

PAUL HUTCHINSON: Absolutely not. And one of the recommendations and one of the observations is that as difficult as it is, one should try and not look at one’s statements on a regular basis.

Morningstar in fact did some fantastic work where they considered an investor who checks their investment values every day.

And unsurprisingly, if you were to check your investment values every day, it’s a coin toss as to whether you would see a fall or a rise in your value. But interestingly, if you move that out to monthly, 36% of the time, you would see a fall in your investments. And in fact, even if you look at your statements on a quarterly basis, you would see a fall in your investment 31% of the time. So looking at your investments on a regular basis quite often results in anxiety because what you are observing is a decline in the value of your investment.

I think most financial advisors try and have at least a bi-annual review with their clients and that’s probably a fairer period over which to consider your financial wealth or your progress towards your long-term financial plan.

But if I can go back to the point that I tried to make earlier, financial planning, retirement planning, is a long-term game. And while we all like to look at our values on a fairly regular basis, it’s quite destructive and often results in incorrect behaviour. And that’s really taking us back to the work that Daniel Kahneman and Amos Tversky did around decision-making in times of uncertainty, in times of risk. And the recommendations from that is to try and look through that period and recommit to the long-term financial plans that you’ve put in place.

RYK VAN NIEKERK: I hear what you’re saying, but let’s look at cash for a moment. Because currently I know interest rates in South Africa have fallen quite significantly since the beginning of the year, more than two percentage points, but still you can get yields of 11.25% from retail savings bonds, which is a very attractive yield as opposed to the significant volatility we are seeing. So how should an investor look at cash and the yields that are available there – almost guaranteed yields versus possible yields in a very volatile equity market?

PAUL HUTCHINSON: That’s a great point. And I would make a couple of observations.

Firstly, retail savings bonds were offering 11.5% if you locked your money away for five years in April. That rate has reset to 10%, so what you saw in April was bond yield spiking. And anybody who invested in a retail savings bond in April benefitted from that spike. Long-dated yields are coming down and as I say, rates have reset to 10% at the short end. And what you’re trading there is the certainty of a 10% return. But you’re locking away your money for five years. If you come to the short end, overnight cash rates are already down to around 4%, [and] money market fund returns will trend down from here.

So while cash has proven to be a fantastic place to be invested over the past three or four years, generating attractive real returns, that picture is changing with the actions of the South African Reserve Bank over the past four months. As we say, rates are down 225 basis points so far year to date. And it’s likely when the reserve bank monetary policy committee meets again towards the end of May, they may well reconsider the repo rate at that meeting given where inflation is trending.

RYK VAN NIEKERK: Paul thank you so much for joining me today and hopefully we can take this to heart. It’s not easy to look at, you know, capital values being depleted or reduced. But as you’ve said, the research shows that if markets recover you will be better off in the long term. And that’s probably all we want to achieve, are the best possible results in the long term.

PAUL HUTCHINSON: Exactly. And if I can quote, and I don’t often like to quote people, but Charlie Munger, who is possibly one of the longest-term investors in the world, I think he’s closing in on 100 years himself.


PAUL HUTCHINSON: … 96, [and] he makes the very interesting observation that the big money is not in the buying or the selling, but in the waiting. And I think that’s what we’ve all got to try and train ourselves to do over the coming months and years.

RYK VAN NIEKERK: Thanks, Paul. We’ll have to leave it there. That was Paul Hutchinson, he is a sales manager at Ninety One.

Brought to you by Ninety One.



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One needs to be very careful here. Bear markets often eliminate companies in their entirety. They are never coming back.

Think Didata, Persetel, Edcon, SAA, Educor, the list goes on.

So this advice applies only to buying the index, not individual shares. A shareholder in MTN is still under water 25 years later, and how long will a Sasol shareholder who bought in at 600 rand have to wait to recover his money. Maybe never.

One also needs to factor in the notion of global economic collapse. A huge feature of today that wasn’t present in past recessions.

At some point the bear market will be permanent and I think we’re right there now. Paradoxically this could result in markets moving much higher as countries debase their currencies (think Zimbabwe) and already there is a clear disconnect between the real and the financial economy.

This is driving the whole inequality divide and it’s attendant social unrest. It’s also a feature of collapsing societies.

Think the game monopoly. When the last player owns the whole board….the game is over.

I agree! Very astute observations!

It’s a real conundrum to say “don’t look at your financial performance, and then it will be better”.

My own experience has regularly been that one must be CONSTANTLY questioning the suitability of your finances against your long-term GOAL.

That doesn’t mean making changes every 5 minutes, but it does mean reaffirming the assumptions driving financial decision-making.

I like your “monopoly comment”.

It has great relevance to the current financial direction.

When – as is happening now – ENORMOUS wealth is being PERMANENTLY concentrated in the hands of the VERY FEW, then the game IS essentially OVER for the rest of the players!

This seems to be the INEVITABLE end-result of the Capitalist system.

This outcome cannot end well.

“Think the game monopoly. When the last player owns the whole board….the game is over.”

This is exactly my thinking with regards to the Federal Reserve. They are printing to keep the NAsdaq up.
In particular, focusing on 5 to 10 shares big companies.
Once they have purchased everything….well … whats left??? Exactly to your point…. game over!

Didn’t a Japanese telecoms giant purchase Didata for &3 billion+?

I think it is absolutely sage advice not to switch into cash, but, what moves the market more under such conditions is when mutual funds are sold out of by clients who want to preserve their monthly income. My own share portfolio has suffered a paper loss of just on R 1 million and it takes some hard question and answer sessions with oneself not to follow the herd and sell. Fortunately I have been buying/selling shares since 1967 so have been through some fairly substantial corrections. It is indeed a good time to re-examine ones portfolio and light your holdings in some counters and buy others that may be longer term contributors to your wealth. Bit like to lotto slogan “You gotta be in it to win it”

Agree – when it’s a ‘paper loss’, it’s not an actualised loss. But if you sell your shares when they are rock-bottom, you then have a real loss. Yes, there are the Didatas, Educons etc, but if invested in a share where the company is reasonably likely to continue trading because they supply a necessary asset (e.g. food or medicines), to me it makes sense to stay in a ‘paper loss’ situation, sit it out and not actualise it.


If you were clever or lucky or both and bought something that doubled, there is nothing wrong with saying hey boys, I can sell half and own the other half “free”. When it doubles again, you again sell half. You might miss out on some very unique 10X but you will always have gained.

Ask the Steinhoff investors that bragged about their 500% gains how that strategy would have played out.

It only makes sense to be overly invested in companies that (1) you run or are very close to and/or (2) are Apple/Netflix/Amazon if you invested in 2009

Behavioral economics research by Thaler etc gives exactly the opposite that 91 is trying to boost. People generally do not follow rational economic theory. All of Thaler research supports risk aversion

In equity investing terms, it always pays to “leave something for the next guy”.

Say you bought into the S&P in 2009 at around 850. What followed was an insane bull run to 3300 early this year. When it got to Schiller 33 multiples you figure : been good but the party cannot carry on forever and transfer SOME to cash or prefs or A rated bonds. The probability of going down 30% to 2300 far outstrips the probability of going to 4300. Exit, pay the CGT and you are still a very happy camper especially how our CGT works. Not parking cash forever, but just keeping some ammo to buy into the next 2009 opportunity

All of above is US equities perspective by the way : South Africa was a basket case with the Zuptas.

I get the feeling 91 supports the buy buy buy mantra?

End of comments.



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