The latest unit trust statistics from the Association for Savings and Investment South Africa (Asisa) show that local investors moved a lot of money away from funds with exposure to equities during 2019. Instead, they preferred to invest in cash and bonds.
South Africa multi-asset income funds attracted R70.5 billion in net inflows for the year, while short term bond funds saw net inflows of R51 billion. South Africa equity general funds, on the other hand, felt net outflows of R13.5 billion, and there were net outflows of R2.1 billion from South Africa multi-asset high equity funds.
This suggests that many local investors have decided that they don’t like the prospects for stocks on the JSE. They would rather invest in the perceived safety of lower risk assets.
In the short term, they are certainly being rewarded. As the table below shows, multi-asset income funds, short term bond funds and even money market funds have all outperformed local equity funds, on average, over the past five years.
However, investors shouldn’t ignore the longer term figures. Over 10 or 20 years, equity funds and multi-asset high equity funds are clearly the top-performing categories. This shows that over the long term, the stock market remains the best way to meaningfully grow your wealth.
Taking a time-out
Many investors might respond to this by arguing that they are not moving out of the stock market permanently. They are just putting their money somewhere else while returns are so much better in bonds and cash.
They intend to move back to the JSE again when the time is right.
This seems like a perfectly reasonable strategy. Stock market returns have been poor, the risks on the local stock market seem high, and bonds and cash have been performing above inflation.
The timing decision to get out of the market might therefore appear easy. Anyone who decided to move away from stocks in the past five years can probably feel like they made the right decision.
You have to be right twice
However, getting out of the market at the right time is only half of the equation. For this to be a successful strategy, you also need to know when to get back in again. And this is a lot harder than it sounds.
As PSG Asset Management chief investment officer Greg Hopkins reminded investors earlier this year: “Nobody ever rings the bell.”
Nothing illustrates this better than what happened on the US market in 2009.
This was the year after the great financial crisis, when the S&P 500 fell 38.5%. That made 2008 the worst year on the New York Stock Exchange since the Great Depression.
Going into 2009, there was no sign that things were improving. The growth estimate for the US economy at the start of the year was -2.9%, and unemployment had risen from 6.2% in August 2008 to 8.1% in February 2009.
The US economy even underperformed expectations in the first quarter of that year. The country’s GDP growth for the first three months of 2009 was -4.4%.
Nothing changed, and yet everything changed
There was nothing to suggest that the worst was over. In fact, the unemployment rate kept climbing for most of 2009. It peaked at 10.2% in October.
The stock market recovery, however, began on March 9. In the midst of this extremely poor news, the S&P 500 turned and began one of the strongest bull markets in history.
There was no catalyst for this, no obvious reason for the improvement, and no sign that it was, in fact, even happening at all.
Many investors regarded the uptick as nothing more than a temporary anomaly, and believed that the market still had further to fall.
Over the whole of 2009, however, the S&P 500 was up 26.5%. It made another double-digit gain in 2010, and over the course of that decade recorded annualised returns of 13.2%.
This shows how difficult it is to identify the right time to get back in to the market. There is rarely, if ever, anything to show that the correct moment has arrived.
As Methodical Investment Management pointed out in a recent note, many investors underestimate how difficult it is to get this right.
“A simple calculation proves that odds are not in your favour,” Methodical notes. “The best investors don’t even have a 55% success rate in getting their investment decisions right, but let’s say for example that you have a crystal ball and are able to get the calls right 60% of the time. To get it right twice (on exit and entry), you only have a 36% chance of making the right decision (60% x 60% = 36%).”
In other words, even someone who is an investment genius has only little more than a one-in-three chance of being correct. For ordinary mortals, the chance is really far lower than that.
As 36One Asset Management stated in a note to clients:
“If timing the market exactly were possible there would be a lot more yachts in the world. To consistently get the calls right takes resources unavailable to the average investor.”
The markets never warn you what they are going to do next. The best approach is therefore to get the odds in your favour as much as possible with a solid long term strategy.
Trying to time the market, however, is doing the opposite.