Amid the ever-shifting tides of financial markets, investors often find themselves bombarded with conflicting opinions, sensational headlines, and the allure of market timing.
However, the wisdom of seasoned experts and historical data emphasises that the true path to wealth lies in a patient and disciplined approach to investing.
Roné Swanepoel, business development manager at Morningstar South Africa, has emphasised the significance of maintaining composure amid market volatility.
Swanepoel warned that as markets ebb and flow, and uncertainty looms, it becomes all too easy to be swayed by emotional responses and the desire to time the market.
Headlines touting, imminent market crashes, revolutionary investment opportunities, and urgent moves away from certain assets can hijack the investors’ attention, making it increasingly challenging to focus on the bigger picture, she said.
Swanepoel has cautioned against the impulse to make drastic changes to investment portfolios in response to such headlines.
Echoing the sentiments of renowned financial writer, Morgan Housel, she asserts that a significant portion of successful long-term investing involves the power of doing nothing. At the heart of this philosophy lies the acknowledgment that the stock market, despite its fluctuations, generally trends upward over time.
“The one factor that remains constant is that to derive these positive returns, you must be invested. Unfortunately, that involves staying invested through periods when markets go up and down. Why? Because no one can accurately and consistently time the market,” she said.
As highlighted by Swanepoel, the pivotal lesson here is the distinction between being in the market versus attempting to time it.
Market timing, a tempting yet elusive endeavour, is fraught with risks and uncertainties. Swanepoel illustrates this through a comparison of two hypothetical investors: one who continually attempts to time the market and another who adopts a steadfast “buy and hold” strategy.
The “buy and hold” investor allows the magic of compound interest to work overtime, resulting in substantial wealth accumulation.
Swanepoel underscored that this concept is further supported by Morningstar’s Mind the Gap study, revealing a persistent difference between reported total returns and the returns investors realise.
“The report found that fund investors earned a 9.3% investor return (which reflects the impact of cash inflows and outflows on the returns investors earn) over the 10 years ended 31 December 2021, while their fund holdings generated an 11% annual total return over the same period. Therefore, investors suffered a 1.7% annual return shortfall, or gap, due to “mistimed” purchases and sales.
“Assuming compound interest, this is close to a 2% difference annually and can make a very large impact on your investment journey. The other 1% will change your life”.
To guide those entering the world of investing, Duma Mxenge, Satrix business development manager, offers the following tips for novice investors: • Start with a manageable amount: Begin with a modest initial investment, such as depositing R10 per month into your savings account.
• Grasp market dynamics: Educate yourself about the functioning of the stock market. Understanding how economic changes influence the stock market will empower you to make informed decisions.
• Craft a detailed investment plan: Develop a well-defined investment plan, including your objectives and time line. This roadmap will serve as a steady guide, ensuring you stay focused on your goals.
• Embrace diversification: As you gain confidence, diversify your investment portfolio. Explore various asset classes (such as property, shares, bonds, and cash) and industries. This strategy cushions your investments against potential underperformance during downturns.
• Cultivate a learning mindset: Investing is a dynamic realm brimming with opportunities. Continuously educate yourself about how your investment persona responds to market fluctuations, staying composed during volatile periods, and identifying investments with promising potential.
“Being a good investor does not necessarily mean hours spent researching a stock or investment. The crucial trait of a good investor is discipline,” Swanepoel said.
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