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It makes no difference whether the JSE went up or down today

Pay attention to what matters.

If you listen to radio news every day or watch regular television bulletins you might think that what the JSE does every day is important. News readers seem to be obsessed with telling everyone how the All Share Index or Top 40 have performed in the last few hours.

This information is, however, largely meaningless. And it is particularly meaningless to anyone who considers themselves a long term investor.

On any given day, the JSE is almost as likely to fall as it is to rise. Analysis done by Old Mutual’s MacroSolutions boutique has found that, on a day-to-day basis, there is a 45% chance that the market will deliver a negative return.

This doesn’t change much over a week. On a rolling basis, there is a 43% chance that the JSE will go down over any week, which is still largely random.

There is therefore no real value to be gained by knowing the daily, or even weekly, movements of the index. It will go up and it will go down. That is the nature of the stock market, which is inherently volatile in the short term.

Working over time

What is important to any genuine investor is how the market performs over much longer periods. This is illustrated in the graph below.

Source: MacroSolutions

What is far more significant is that over any five-year or 10-year period, the JSE has never delivered a negative return. And over the very long term, the performance of the stock market is also far superior to any other type of investment.

The graphic below shows the performance of the three major local asset classes over nearly nine decades. The superiority of the stock market is obvious.

Source: MacroSolutions

In order to earn these returns, however, you have to accept the short term risks. As Fernando Durrell, portfolio manager with Sanlam Investments, explained at the Glacier Investment Summit in Stellenbosch, this is not a question of timing. It is about patience.

Small margins

In the graph below, the dark blue line shows the return someone would have received from the FTSE/JSE All Share Swix Index if they remained invested over the full period. The variations either way illustrate what the result would be of missing either just a few of the best or worst days of market performance.

Source: Sanlam Investments, Iress

Just missing the single best day of performance over these 24 years would mean that an investor would see only 92.8% of the return. That is a substantial reduction for missing just one trading period out of the 6 000-odd days in this sample.

“If you missed the best five days, your portfolio would be 30% lower, and if you missed the 10 best days it would be close to 45% lower,” Durrell noted. “That talks to being in the market.

“But on the flip side, suppose you could avoid the worst day, your portfolio would have been 13% better,” he added. “If you missed the worst five days you would have 53% more and missing the worst 10 days would mean you would have 110% greater.”

The question this raises, however, is whether you could time the market to use this to your advantage.

“There are reasons for being in as well as out of the market,” Durrell said.

“The problem is that your best day and your worst day are frequently separated by a day, so you have to be close to clairvoyant to predict accurately when to get in and when to get out.”

Can you tell the future?

This is illustrated in the graphic below. The vertical lines above the horizontal indicate the best days of performance on the JSE over this period. Those below, illustrate the worst days.

Source: Iress

It is clear that the largest ups and downs are frequently grouped together. Devising a strategy that would see you in the market for the best days and out of the market for the worst days is therefore impossible.

It makes far more sense to use a strategy that allows you to capture as much of the upside as you can on the good days, while reducing the risk on the downside. That is precisely what a good balanced fund should do – give you exposure to the market by having a high weighting to stocks, but balancing that with other asset classes like bonds and cash, which offer downside protection.

“What you really need to do is have a diversified portfolio that is able to manage the risk,” says Durrell. “That is something that gives you exposure to downside risk management and allows you to participate in the upside.”

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This article is quite correct if you invest by looking in the rear view mirror.

Here are some questions you might ask of the future

1. Is South Africa currently in a state of collapse? Will it get better or worse? How long can we last?

2. Is the world currently in a state of collapse? Why? Will it get better or worse?

3. What will the impact of global warming be on the global and South African economies? How soon?

4. Are there any assets or investments that can or might escape these conditions?

How you answer these questions will depend a lot on your own research and ability to join the dots.

What’s pretty clear though is that these are not the questions you would have asked 100, 50, or even 25 years ago.

And if you’re not asking them, well, in my view, you are looking in the rear view mirror. Good luck with that.

You are so right. My argument exactly with my FA. And attending seminars by the illustrious unnamed asset ‘managers’ is always the same. You Mr retail investor rely on past performance and so you will definately be proven wrong. The questions you are asking are exactly the ones they sidestep. That said we survived 2 world wars and a few depressions. But my bet is that the global village of today is much different to those. Nobody can see what tomorrow brings. We can only be GUIDED by the past.

Incorrect. These questions have been asked 25, 50 and 100 years ago.

1. Is South Africa currently in a state of collapse? 1948 “Apartheid”, 1961 “SA became a republic”, 1986 “SA Debt default”, 1994 “SA Democratic Elections”…

2. Is the world currently in a state of collapse? WW1, Great Depression, WW2, 1969 Crash, East Asian Crisis, Dotcom and Subprime Mortgage Crisis.

3. What will the impact of global warming be on the global and South African economies? How soon? The greenhouse effect was discovered in 1896.

4. Are there any assets or investments that can or might escape these conditions? Diversification.

Over the past 100 years, equities have produced double-digit returns in spite of the many market downturns (Both Globally and Locally)

Here is a list of movies for you to “navigate” through that would entertain your apocalyptic nature and leave the investing to people with a bit more temperament.

Not just long term investors but even some short term traders. I don’t trade the JSE at all anymore. Rand too volatile. Naspers etc. to big. Political instability. The list goes on.

You can trade the whole world today with the click of a mouse or a tap on a phone. Why bother with the JSE?

What platform is safe world equities and cfds without high like to use both but heard some horror stories with con platforms

In the last 5 years balanced funds outperformed the ALSI, they in turn were outperformed by income funds.

ALSI gyrations play out over a month or more so there is opportunity to buy low and sell high.

In general we currently have an uninspiring investment climate. Only good news is that the rand is holding up.

The commentary applies equally to global equity, and they had an even more interesting decade with the 2008 crash and subsequent bull market. If you had gotten out of the market in 2007, and back in again early 2009, your US equities returns would be running around 18% this century – ignoring all the smaller dips and peaks along the way. Just that one big correct timing event would make you a fortune.

BUT for every buyer there is a seller. In March 2009 there were people falling over themselves to sell Apple at split adjusted $12 per share, Amazon at $70, Microsoft at $15.

AND if you had bought Nasdaq QQQ at its dotcom peak, you would have waited 16 years to get back to breakeven.

It is IMO safer to try and see the really big overall cycles than, having decided you want to enter or leave, argue about exactly when to do so. Getting the year right is more valuable than the month or obviously day.

Long term, the performance of the SA stock market is far superior … ?

After a sobering adjustment for inflation and currency, it’s not very superior. Zimbabwe and Venezuela have been delivering 1000+% returns p.a. for the last 10 years, yet who’s investing?

When using USD ,even the shoddiest of US index funds outstripped our JSE on on a 5,10,20, 50 year basis by miles.

Bottomline – using global historical data, inflation + currencies, your optimal portfolio should look something like 95% offshore, 5% local. Local advisors should stop shanking their clients and making them poor.

95 percent offshore? After the US just went on the longest bull run in history, that’s still going on. Only the brave would go 95 percent offshore.

Yes offshore, not just the US.

There are still better risk/return options abroad. Remember your SA salary and house are also assets exposed the local economy. To diversify, best allocate outside of SA or in commodities like Gold etc.

As a short term investor looking for good overnight or so deals like kumba (up 59% this year) and the pioneer foods (up 45% in the lastt seven days) it makes sense to keep watch of the news or daily ALSI movement. Now I’ve never bought anything that ballooned yet but because I watch the news I haven’t lost that much in the process. This isn’t the strategy I employ with my retirement money, I only do this with money I would’ve spent on coffee, rims for the car and maybe money I would’ve spent on a new TV.

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