When markets spike or plummet drastically in a matter of hours, reacting immediately seems to many investors to be the only course of action. These two experts say it isn’t.

Playing the long game with your investments

Keeping calm and doing nothing may be easier said than done in this information age, with its 24-hour access to news, opinions and online fund platforms, but there are some compelling reasons why staying away from the dark side of quick fixes and sticking to your investment plans can mean greater success in the long term.

It’s human nature to react more strongly to bad than good news, perhaps because many negative events (a tsunami, the removal of a minister of finance, the Steinhoff saga) can happen overnight, while good ones (getting out of a recession, drumming up investors’ support) can take time.

‘Humans are predisposed to bad news and negative events, and from an investment perspective, experience twice as much “pain” when seeing a 5% loss than “pleasure” when gaining 5%,’ says Rodney Msimango, Head of Business Development at Old Mutual Corporate Consulting (OMCC).

‘One way to spare yourself the pain of regular negative returns is by reviewing returns and portfolio balances less frequently.’

Not only is ‘ignorance bliss in the short term’, he says, but it can stop investors from making knee-jerk decisions. It’s also important to remember that the longer the investment term, the better the returns.

‘When looking at the South African equity market since 1925, a monthly review shows a 36% chance of a loss, while there is significantly smaller chance of a loss over longer periods,’ says Jerry Mahlangu, an Old Mutual Corporate retail investment specialist.‘When looking at the big picture, we see that an extended holding period (the length of an investment) increases the probability of a positive return. Shorter investment periods expose investors to a greater chance of low or negative returns.’

In addition, history shows that bull markets last longer than bear markets, and equity portfolios typically take three years to recover. ‘It is more important to stay invested for the full period needed to deliver the returns or investment outcomes required,’ says Msimango.

‘Shorter-term needs may require portfolios that deliver returns over a shorter period, where longer-term needs, such as retirement, require investors to be invested over longer periods.

‘The important things investors have to bear in mind is their objective, the investment horizon and the combination of asset classes required to deliver those outcomes.’

Every financial decision affects your retirement

‘Much like most decisions we make in life, the future costs of current decisions are very important when making investment-related decisions for retirement,’ Msimango says with reference to retirement planning.

‘It may be a foreign concept for younger people as they don’t consider retirement to be an immediate concern, thus such decisions are often deferred.’

A recent survey found that a large amount of South Africans are delaying retirement because they can’t afford it. There’s also the fact that people around the world are living longer, and being aware of the effect this will have on one’s standard of living in retirement.

In 2018, Stats SA puts the average life expectancy for men at 61.1 and women at 67.3, but when looking at provincial level, there are important differences.

Women in the Western Cape live to 72.1 years, almost six years longer than those in KwaZulu-Natal, respectively eight and 10 years longer than in 2006.

Predictions and prospects like these magnify the effect of leaving it too late, says Mahlangu. Not taking action today (or as early as possible) will have repercussions later in life.

Stay away from the dark side

Online exchange-traded funds (ETFs) and other digital platforms allow users to compile and manage their own portfolios quickly and easily, even during their lunch hour.

These platforms are more cost-effective, making them all the more appealing, whether someone is a first-time investor or looking for somewhere to put their money after a period of negative returns.

‘Given the need to decrease fees in the investment industry, these platforms have become very attractive. Notwithstanding the value that they add when it comes to fees, they effectively transfer the responsibility for constructing and managing a portfolio to investors themselves.

‘Though some may argue that they have the financial tools and knowledge to do so, they may not have the time to manage their portfolios effectively,’ says Msimango.

Such online tools also remove an important barrier to emotional investment decisions – a financial adviser who could point out the risks of such a strategy. ‘This dark side, as Master Yoda from the Star Wars universe says, is not stronger, just ‘quicker, easier, more seductive’.

Both Mahlangu and Msimango agree: successful long-term investing requires staying the course, particularly when the going gets tough.

Granted, this is easier said than done, given our world and its 24/7 tweets, overload of financial information and market opinions that sow confusion and fear.

But your best investment strategy is to tune it all out and focus on your long-term investment goals.