Article sourced by Duane Nicholls CFP®
Article written by Anet Ahern
The year 2016 was a particularly trying one for investors, but 2017 can be different as long as they focus on returns over the long term and avoid making costly mistakes, says Anet Ahern, CEO of PSG Asset Management.
“Research has proven time and again that markets earn better returns than the average investor. The difference is due to investor behaviour that destroys value, such as greed and fear,” Ahern says.
She lists seven resolutions for 2017 that will help investors achieve better yields:
1. Don't panic about daily market fluctuations
Daily market fluctuations are hard to process and inconsequential in the long run when seen individually. For example, on average the S&P 500 index sees more positive days than negative ones. Since 1950, this equity index has delivered “up” days 53.6% of the time and “down” days 46.4% of the time.
Over this period, the S&P 500 delivered a total annual return of 11% per annum. Even though 2016 was a particularly trying year for investors, it still delivered “up” days 58% of the time (as at time of writing, source: Bloomberg). The SA market as a whole is slightly down for the year to date, but there are local equity funds that managed to get returns of over 25% over the past year.
One can see that fixating on short-term movements can lead to missing out.
2. Use the daily news as dinner conversation, not as an investment decision tool
It is journalists’ job to fill newspapers, magazines and websites with news that attracts readers. Human nature draws us to the boldest headlines and we all suffer from confirmation bias (the tendency to focus on news that supports our views).
This behaviour helps to drive the bear and bull cycles of the market: when markets are down, investors will often disregard good news, while in the bull phase investors will disregard warning signals and continue to drive markets higher. Newspapers and markets trade on sentiment, but that doesn’t mean investors should do the same.
3. Do not subscribe to yet another market feed
More news is not necessarily better – nor will it add meaningfully to knowledge. Focus on a few reliable and credible sources that provide you with a good overview of the market, and trust the judgement of professionals like your financial adviser and portfolio manager.
4. Remind yourself that a share price is an opinion of what a company is worth, and no more
As such, where that price came from is irrelevant to where it is going. Ask yourself what a company is worth now, given what we know. Emotional attachment can lead to costly mistakes.
5. Remember that market prices overreact both on the upside and the downside of the environment
In this lies the opportunity for the rational, long-term investor.
6. Remember that at 10% growth per annum your investment will double in seven years, and at 15% it will do so in five years
The difference buys you two more years of saving. Sticking with a good fund manager will bring the two closer together.
7. When tempted to worry about the future, focus on the things you know won't change.
These include the power of compounding, the importance of diversification, and the impact of skill. By focusing on your long-term investment plan and remembering how market forces can work in your favour even in volatile times, you will be better equipped to ride out the storm.