Diversification, including offshore diversification, and other basic long-term investing pillars should not be disregarded because of volatility caused by geopolitical events, says Kondi Nkosi, the country head of asset manager Schroders in South Africa.
Many money managers and investors would have jumped at the opportunity to increase their offshore allocations after it was announced that retirement funds can hold 45% offshore exposure. But some may be questioning the wisdom of moving more money abroad in the face of the war in Ukraine and their impact on markets.
“Although the JSE has been performing relatively well in the face of the current volatility, with some proponents stating that prospects look positive, South African equities are not immune from international headwinds. With the number of listed companies dwindling locally, South Africans would do well – as always – to bolster their portfolios with offshore opportunities, including in times of international turmoil,” says Nkosi.
According to Duncan Lamont, the head of strategic research at Schroders, four pieces of research show that investors are best served not making impulsive decisions during times of heightened geopolitical tensions.
1. Stock-market investing is less risky in the long run
Using almost 100 years of data on the US stock market, Schroders found that if you invested for a month, you would have lost money 40% of the time in inflation-adjusted terms – in other words, in 460 of the 1 153 months in Schroders’ analysis.
However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money slightly less than 30% of the time. Importantly, 12 months is still the short run when it comes to investing in the stock market.
On a five-year horizon, the figure falls to 23%. At 10 years, it is 14%. And there have been no 20-year periods in Schroders’ analysis when stocks lost money in inflation-adjusted terms.
Although losing money over the long run can never be ruled out, it is a rare occurrence, says Lamont.
In contrast, although cash may seem safer, the chances of its value being eroded by inflation are much higher. The last time cash beat inflation in any five-year period was February 2006 to February 2011. “And this is not expected to change any time soon.”
2. Falls of 10%+ happen in more years than they don’t
By 10 March, global stock markets had fallen by 10% from their peak. But this is not as unusual as it seems. The US market has fallen by at least 10% in 28 of the past 50 calendar years – in other words, more often than not. In the past decade, this includes in 2012, 2015, 2016, 2018 and 2020.
Despite these bumps, the US market has returned 11% a year over this 50-year period overall.
The risk of near-term loss is the price of the entry ticket for the long-term gains that stock-market investing can deliver, says Lamont.
3. Bailing out after big falls could cost you your retirement
During times of heightened volatility and market declines, it can become harder to avoid being influenced by our emotions and ditching stocks and dashing for cash.
However, Schroders’ research shows that, historically, that would have been the worst financial decision an investor could have made. It pretty much guarantees that it would take a very long time to recoup losses, says Lamont.
For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breaking even in early 1945 if they had remained invested in the stock market.
And the stock market ultimately fell over 80% during this crash, so shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy, says Lamont.
Similarly, an investor who shifted to cash in 2001, after the first 25% of losses in the dotcom crash, would find their portfolio still under water today.
“The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run,” says Lamont.
4. Heightened fear has been better for equity investing than might have been expected
The war between Russia and Ukraine has sent the stock market’s “fear gauge”, the Vix index, higher. The Vix is a measure of the amount of volatility traders expect for the S&P 500 index during the next 30 days.
However, rather than being a time to sell, historically, periods of heightened fear have been when the brave-hearted have earned the best returns. On average, the S&P 500 has generated an average 12-month return of over 15% if the Vix was between 28.7 and 33.5 – and more than 26% if it breached 33.5.
Schroders also looked at a switching strategy, which sold out of stocks (S&P 500) and went into cash daily whenever the Vix entered this top bucket, then shifted back into stocks whenever it dipped back below. This approach would have underperformed a strategy that remained continually invested in stocks by 2.3% a year since 1991 (7.6% a year versus 9.9% a year, ignoring costs).
A $100 investment in the continually invested portfolio in January 1990 would have grown to be worth twice as much as $100 invested in the switching portfolio ($2 332 versus $1 157).
“As with all investment, the past is not necessarily a guide to the future, but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock-market investing than might have been expected,” says Lamont.