Learning about your personality as an investor, such as your risk tolerance, requires a fair amount of time and patience; trial and error will also help craft your investment behaviour. As such, capital market history, especially in developed countries, is filled with case study events rich with investment lessons.

“The local capital market is still compared to more developed markets like the US. There are, however, many market incidents – even in South Africa – that give a strong learning curve to investors. One of the basic lessons that must always be remembered is that of patience,” says Luke McMahon, research and investment analyst at Glacier by Sanlam.

Cash-strapped investing

When the mantra of patience is forgotten, things get tough. In 2016, the temptation offered by the All Share Index’s slim 2.68% return was a case in point. Investors caved to abruptly change investment strategies before allowing a particular investment time in the market and de-risking to a cash position in fear of market volatility and loss of capital.

The cash-trap is essentially the opportunity cost of the gains an investment could have achieved had it been allowed to work and compound over a meaningful period, instead of being diverted to a cash investment.

In previous years, local investors have enjoyed double digits annualised from local equity. Since 2009, they provided an annualised return of 15.42% on a total return basis. It has been the second longest bull run in history.

The local capital market is still compared to more developed markets like the US

“But when you look at it closely, from 2009 to 2014, investors experienced 20.37% annualised return. For those who have been heavily exposed to South African equity over the last three and a half years, it has seemed that those golden years are over. Since 2014, local equity has yielded 2.75% on a total return basis,” says McMahon. When you consider the fact that at the end of second quarter in 2017 the majority of South

Africa’s retail collective investment scheme investors were invested in general equity and South African multi-asset high equity (75% equity) funds, which are heavily weighted to South African equity, you can see that a lot of investors’ portfolios were under strain.

No need for hindsight

Hindsight is great, but if an investor is disciplined when following a carefully considered investment plan, hindsight won’t be a major concern anymore. A clear example of this is 2016, a tough year for everyone.

“Those looking for growth from traditional risk investments last year (2016) would have been hard-pressed to look at their calendar year performance as equities severely underperformed cash. For most investors saving towards retirement or actual retirees requiring high growth due to not having sufficient savings, 2016 was a year of pain. Especially since most of these portfolios would have had a higher tilt towards local equity,” he explains.

Throw in politics and confidence in the capital markets drops even more. A difficult year, combined with extreme market volatility due to unstable political climates, led many South African retail investors to increase their cash holdings.

Association for Savings and Investment South Africa recorded the highest net inflows over the first (R11.1 billion) and second quarter (R20.6 billion) in 2017 going to South African interest-bearing funds, particularly money market and income funds. There is no surprise that net inflows for equity funds in the last quarter of 2016 were negative (-R637 million).

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To the shock of many, equity markets around the world rallied to new highs amid strong corporate earnings and synchronised global growth in major economies. Locally, South African investors who remained invested in equity instead of switching to cash would have benefited significantly from the strong rebound. This is quite evident in the 13.3% outperformance of South African equity over South African cash as at 31 October 2017.

“An investor who was heavily invested in general equity in 2016 and then switched just before 2017 would have experienced a twofold drawback to their portfolio, in the form of low returns in 2016 and the opportunity cost (missed excess return) of the strong equity recovery in 2017,” says McMahon; long-term patience lost to short-term worry.

Whether an investor is de-risking a portfolio or switching entirely to cash, there are additional worries that a client may forget about. “Firstly, capital gains tax may be triggered and become payable by selling out of the original portfolio. Secondly, there is the loss of the compounding effect over time of the potential excess returns that may have been achieved had the portfolio been left to work as originally intended,” warns McMahon.

Knee-jerk reactions bite when it comes to the market. Once cash-trapped investing comes into play, reaching the desired investment objectives gets that much harder. So be patient.