While it’s easy to stay the course when the stock market is going up, being comfortable in down periods when the market is roiled in volatility is key.
This is according to Rehana Khan, a portfolio manager at asset manager at Ninety One, who was speaking at Moneyweb’s Better Investor Conference on Tuesday, themed around long-term investing and building generational wealth.
“Turn [the] volatility of the market into a friend,” is the main piece of advice from Khan.
As in many major economies across the globe, South Africa’s stock market, although up over 2% year to date, has faced a number of challenges this year, including Russia’s war in Ukraine, and rising interest rates spurred by high levels of inflation. This, among other factors, has clouded the outlook for many investors.
In such cases investors may panic and sell, often to their regret later on.
“It really is about sticking to your knitting and being disciplined,” says Khan.
“If you take a step back – and [if] you’ve got a framework that works, in terms of how you make money, what makes a share go up; and you stick to that framework – volatility actually starts to be a friend.”
Investors should consider the plausible outcomes and valuations of the companies they hold over a period of 12 to 18 months, before making the decision to sell them off, she adds.
Inflation and equities
The bigger risk for investors over the long term, according to Renier de Bruyn, senior investment analyst at Sanlam Private Wealth, is inflation – which in South Africa peaked at 7.8% in July.
He says amid high inflation, equities emerge as the biggest winners over the long term, relative to other asset classes.
The risk of volatility reduces over time, compared with inflation, which erodes returns, he adds.
“If you invest in equities for the reasons of building long-term wealth as the preferred asset class, you must be [more] prepared – emotionally – to suffer those drawdowns.”
De Bruyn says investors should understand that equities over a long period have consistently outperformed, but they “will test your limits”.
“There are times when the market came down by 48% in a 12-month period, and that is often where investors who had a plan with equities fall by the wayside because they simply can’t stomach that volatility,” he says.
“And often then they sell at the wrong time, and that becomes a material disruption to their wealth for the long term.”
Khan says investors should leverage the opportunities brought on by down periods.
“As the share is falling and the conviction on the earnings is still in place, you then want to top up that particular company because you know it will come through,” she says.