Rob Tippett from Roxburg Trust


As with all bear markets, where the stock markets fall by more than 20%, the recent Corona virus induced market crash caused all investors to question their investment strategy and many must have thought about rushing into cash in order to “protect” the value of their investments.

In the below extract of an article written by Paul Hutchinson, Sales Manager at Ninety One Asset Management, he argues behavioural finance explains this urge and that the better option for long term investors is to stay the course.


At a glance

  • Investors are believed to feel the pain of loss more than the pleasure of gain (loss aversion).
  • This theory is proven time and time again during market corrections when many investors switch from their growth investments to cash.
  • However, an analysis of the past eight bear markets shows that the best action is to do nothing and remain invested.
  • During uncertain times, together with your financial advisor, it is best to revisit your long-term financial goals and recommit to the plan you have put in place to achieve them.

Loss aversion is a powerful concept in behavioural finance, first articulated by Kahneman & Tversky in 1979. Simply put, investors are believed to feel the pain of loss twice as strongly than the pleasure of gain, as illustrated in Figure 1.


In Figure 1, the dark green line illustrates fund performance – on the right-hand side of the vertical axis performance is positive (investors make a profit) and on the left, performance is negative (investors make a loss). The light green line represents investors’ experience of that profit or loss, illustrating that the pleasure investors receive from incremental profits is less than the pain associated with incremental losses. Unfortunately, this theory is proven true time and time again during market corrections such as we are currently experiencing. Unable to stomach these significant losses, many investors panic and switch from their growth investments to cash, thereby crystallising what was only a paper loss until that point.

An analysis of the Association of Savings and Investment (ASISA) industry flows reinforces this. ASISA has data for the periods around the last two bear markets (2002 and 2008) prior to the current one. Simply, in the final stages of the bull market, investors were pouring money into equity funds (higher risk/higher reward investments), and then in the year following the stock market collapse, they were withdrawing money from equity funds and investing the proceeds into money market and income (lower risk/lower reward) funds.


50 plus years of SA equity market performance – what does it tell us?


In the following section, we consider the client experience following all SA equity market corrections of more than 20% over the past 50 years, including the latest correction from February 2020.


As illustrated in Figure 2, you will note that since 1965, there have been no fewer than nine corrections where the market has fallen by more than 20%.

Some observations:

  • Bear markets are often deep, but importantly short.
  • Bull markets take longer to play out, giving rise to the over-used phrase; ‘bull markets climb a wall of worry’, but importantly, bull markets more than reward those investors that stay invested.
  • The recovery from the bear market is often very swift; anyone sitting on the sidelines is unlikely to benefit.

With the benefit of hindsight, was the decision to switch to cash the right one? We believe not and point to the following analysis in which we have considered the outcome of two investors who both invested R10 000 prior to each of the last eight bear markets (i.e. at the market peak). Let’s call them Mo’ Money and Lo’ Money.

While admittedly concerned about the impact of the market collapse on his nest egg, Mo’ Money weathered the storm, remaining invested throughout. Lo’ Money unfortunately could not stomach the impact of the market collapse on his nest egg and switched to cash at the market trough. Then, true to the psychology of many investors, noticing that the stock market was recovering and not wanting to miss out, he reinvested into the market a year later. Lo’ Money subsequently repeated this behaviour in each subsequent bear market. The following table illustrates just how punitive Lo’ Money’s decision to switch to cash was on his potential retirement capital.


Some observations:

  • In every instance, the switch to cash was detrimental to Lo’ Money’s total investment return.
  • The power of compound interest is evident over the long term; R10 000 growing to R15.4m over approximately 50 years.
  • A 6% p.a. higher annualised return over a 50-year period results in 15 times more money at the end of the period.
  • Many may argue that 50 years is far too long an investment time horizon but consider someone starting work in their early twenties; he would (should) save for retirement for 40 years and then expect to live off his retirement savings for a further 25 years or so – a total investment period of 65 plus years!
  • All the above returns take into account this year’s 30% plus fall in equity markets. This is most evident in the relatively low 6.3% p.a. annualised return for the investment made prior to the 2008/9 Global Financial Crisis – this shorter time frame also included two major market corrections. When the market recovers, so the annualised return will improve.

As a final point, we considered the case where Mo’ Money invested R10 000 at the peak prior to each of the last eight bear markets (i.e. a total investment of R80 000) and compared that to Lo’ Money making the same investments at the peak, but then at the trough of each bear market, switching his accumulated investment to cash for a year before switching back to the market. The results are astounding. Over 50 years Mo’ Money’s investment grew to approximately R35.7 million (an annualised return of 15.6%), compared to Lo’ Money’s R4.4 million (an annualised return of 10.4%).

Extract of full article by Paul Hutchinson, Sales Manage, Ninety One Asset Management.