If the market is down have I lost my money? It is a common question I get asked. Have I lost capital if my current value is less than it was a few months ago?
There is nothing harder than seeing that our investment has dropped in value. But the fact of the matter is that our capital will fluctuate as the underlying assets—shares, property and bonds—vary in price depending on market conditions such as the Rand exchange rate, political stability, economic growth and inflation. Historically the South African stock market has grown year on year and, when the market has crashed, it has recovered fully within seven years. This means that, in the past, investors have fully recovered their capital within seven years of a market crash. The problem comes in if investors require the capital prior to the market fully recovering. Over the long term markets are growing, but in the short term it is a very different picture. In the short term stock markets fluctuate considerably and are volatile in nature.
The graph below (supplied by Amity Wealth) shows a balanced fund allocation:
With this fund allocation, the range of return in the first year can be between negative 20% and positive 37%. But over seven to ten years the return is around 12-14% per annum.
The graph below (also supplied by Amity Wealth) shows that returns can be volatile in the short term, but over the long term they are more consistent:
Clients only lose their capital if they disinvest their money when their funds are down. If their capital is down and they require the capital they will realise their loss. Selecting the correct funds for your investment’s time horizon is important. If your investment period is short, a money market or stable fund is better suited. With a longer time horizon, a balanced fund is a good choice. And with a 10+ year time horizon, an offshore or local equity fund is better suited.
Unless clients disinvest, money is not lost; the fund value is down, and it is better to wait until the market recovers before withdrawing any capital. The time horizon of the investment is key and it is important to realise that with growth comes risk. The more growth we require, the higher the risk. Over the long term the risk is minimal (as per the graph above), but in the short term there is a lot of volatility. When investing we have to balance the term of the investment with the return that is required and the related risk.
I recommend you only look at your investment portfolios once or twice a year to get a more accurate picture of the growth. Bear in mind that markets do fluctuate and, if you are concerned, please let me know so we can discuss the underlying unit trusts.
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