Investing during a recession

 

When markets are volatile, as they currently are, investors often react emotionally by making changes to their investment portfolio. These changes include withdrawing from investments entirely, switching from one fund to another, or changing asset classes.

Between the start of the year and the end of August 2018, the JSE All Share Index gained 0.3%. Over the same period, the All Bond Index returned 4.5%, SA Cash gained 4.8% and listed property fell by a whopping 20.1%1. Early in September, data released by Stats SA showed that the country has slipped into a technical recession.

A recession occurs when there are two or more quarters of declining growth. The economy shrank by 0.7% in the second quarter of 2018, following a contraction of 2.6% in the first quarter of the year. This investment climate may have raised some concerns for investors.

That's why Discovery Invest has launched a campaign designed to help navigate the investment journey during a technical recession. Our series of articles will cover the following topics:

  • Investing trends during a recession
  • Three things history teaches us about investing
  • The impact of global markets on South African investments
  • Behavioural finance – what happens when you react to short-term market news?
  • What affects investment returns?


When markets are volatile, investors should avoid knee-jerk reactions

Investments are often intended to be long-term instruments – starting from five years and going up to as much as 40 or 50 years in timelines. It doesn't make sense to plan for these events so far in the future and then to reassess the investment strategy every month. The illustration below from New York Times columnist and Certified Financial Planner, Carl Richards of TheBehaviorGap.com, is a reminder that it is a bad idea to react to short-term market movements.

"That's like planting an oak tree and digging it up every month to see if the roots are growing," according to Richards. (Oak trees take 20 years to reach maturity and can "live" for more than 100 years.) 

In a similar way, it's a terrible idea to have a long-term investment plan that is designed to achieve a specific goal and then to try to adjust that long-term strategy by making short-term guesses about which way the market is moving right now. This illustration speaks to the point that as an investor, the best thing you can do is simply leave your investment alone, and remember that the small paper losses in the short term will be outweighed by the overall growth of the portfolio in the long term. Basically, sticking to a long-term investment strategy pays off in the end.


Why Discovery Invest should be your partner of choice

Despite the current difficult economic environment:

  • The Discovery Balanced Fund had a return of 9.07% for the year to end August 2018 against a benchmark return of 3.80%2
  • The Discovery Diversified Income Fund had a return of 8.47% for the year to end August 2018 against a benchmark return of 7.29%2
  • Our flagship fund, the Discovery Balanced Fund, was the 7th biggest flow taker in the industry, with net flows of R989 million for the second quarter of 2018, making it the 12th biggest retail fund out of more than 1 000 funds in the country (excluding money market funds), as per ASISA (www.asisa.co.za)3
  • The Plexcrown Survey for quarter two 2018 shows Discovery Invest retaining a place among the top five asset managers in the country4.

These accomplishments should reassure clients that their investments are in the right place and there is no need to venture off track by reacting to short-term market movements or downward cycles.

 
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