What happens when investors react to short-term market news?

 

In the next part of our Investing in a Recession series, we look at how being familiar with investing behaviours can help investors avoid certain investing mistakes when reacting to short-term market news.

Investment risk profiles range from the risk-takers on one end, to conservative investors on the other. Risk-takers are those who are comfortable making choices that can have extreme positive or negative consequences, while the conservatives are those who spend weeks buried in spreadsheets before they make the most straightforward decision.

Below are brief descriptions of the different risk profiles.

The different investment risk profiles

Broadly speaking, investors typically fall within one of the five risk profiles below. Investors' risk appetites and the level of return they require determine which profile they fall under.

Conservative

A conservative investor seeks to preserve investment capital as far as possible, using a low-risk investment strategy. This investor requires consistent and low variability in investment returns.

Moderately conservative

A moderately conservative investor seeks to preserve investment capital while achieving stable capital growth. This investor is prepared to take on a little more risk than the conservative investor and requires consistent and low variability in investment returns.

Moderate

A moderate investor prefers capital growth over capital preservation. This investor is prepared to tolerate moderate fluctuations in the year-to-year value of their portfolios and usually have enough time to recover from market downturns.

Moderately aggressive

A moderately aggressive investor seeks capital growth. This investor is willing to accept significant risk and can endure large losses in favour of favourable long-term investment returns.

Aggressive

An aggressive investor seeks maximum capital growth by using an investment strategy that is higher in risk and potential returns. This investor is prepared to tolerate fluctuations of investment returns and has a much longer investment time horizon.

Investors from different risk profiles face different investment pitfalls

Investing always involves risk. And it's this risk that, over the long term especially, is translated into some level of reward. Investors with moderately aggressive or aggressive risk profiles may take too much risk, while conservative and moderately conservative investors may take too little.

Investors can avoid these pitfalls by understanding their money biases. When investors know how they respond to short-term market fluctuations, it will assist them in finding an investment strategy that strikes a balance between offering them comfort and attempting to remove unhelpful emotions from their investment and saving decisions.

Timing the market: A common mistake in reaction to short-term market news

Timing the market refers to the investment strategy of trying to predict market movements and then moving in and out of certain asset classes to maximise returns. This may sound straightforward, but predicting the market can be extremely difficult and can often result in more losses than gains.

For example, research from Investment Solutions, based on I-Net Bridge data, shows that a R100 investment on the JSE (using the All Share Index as the proxy) would have grown to R1 760 over the two decades between 1995 and 2014. An investor who tried to time the market might have missed the 10 best days, which means their investment would be worth almost half that (R965). If they missed the 60 best days, their investment would be worth a tiny R143.

Focusing on those long-term goals will help the investor stay focused, and ignore the noise of short-term market movements that ultimately don't have an impact on the end game. This is why the advice "it's about time in the market, not timing the market" is always valuable to investors.

Why Discovery Invest should be your partner of choice

Despite the current difficult economic environment:

  • The Discovery Balanced Fund had a return of 9.07% for the year to end August 2018 against a benchmark return of 3.80%2
  • The Discovery Diversified Income Fund had a return of 8.47% for the year to end August 2018 against a benchmark return of 7.29%2
  • Our flagship fund, the Discovery Balanced Fund, was the 7th biggest flow taker in the industry, with net flows of R989 million for the second quarter of 2018, making it the 12th biggest retail fund out of more than 1 000 funds in the country (excluding money market funds), as per ASISA (www.asisa.co.za)3
  • The Plexcrown Survey for quarter two 2018 shows Discovery Invest retaining a place among the top five asset managers in the country4.

These accomplishments should reassure our clients that their investments are in the right place and there is no need to venture off track by reacting to short-term market movements or downward cycles.

 
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