Letter from and reply to an anxious investor

Dear Gregg

“Your pest client again! I was listening to an economist talking on the radio yesterday & he said we were not just in a recession but we are in a depression & it might take 10 years to come out of this. What if:

  1. What would it cost if I sold everything in my portfolio.
  2. Put it all into the money market.
  3. What are the Tax implications every year.
  4. When it came up to the level I am at now we buy everything back again & what would that cost.

Just a thought. I can just see you pulling your hair out …… saying oh X, X…I was thinking say I lost R300 000 doing the above as apposed to maybe losing R500 000 or maybe even R1 000 000.”

And then my reply…

You are not a pest – far from it…

I am going to try and answer your question with the points below – if you are still not happy then we can get into more details.

Below is a graph of the Gryphon All Share tracker fund – it pretty much is a proxy for the whole of the JSE (and for other markets as well, as you should see).

The graph is from the 4 March (pretty much when markets started their serious downturn) until 19th April…and my points are as follows:

  • It is incredibly easy to get out of the market – you just move everything to cash – you would have lost 21% in doing this (that’s how much it fell) and I use the word “lost” very deliberately because you would have realised the fall by selling and as a result, the loss will be real.
  • With the benefit of hindsight, let’s imagine that you managed to get out around the 16th March (close to the bottom) and that you moved to the money market (safety)
  • The plan is to go back into the market at some stage in the future…
  • While you are in the money market funds you would now be earning a taxable return of ±5-5.5% pa – that’s all
  • However, since the bottom, the market has now moved up ±22% (it still has some way to go to where it was) but you have now missed that 22%…this is on top of the 21% loss you realised.
  • So you continue to wait…and…one or more of the following happens.
  • The market could continue to go up – and you still wait
  • The market could fall a bit, but not all the way back down to where you sold – and so you wait
  • The market could fall a lot, past where you got out, and so you wait because it might still fall further
  • Then the market goes up a bit – close to where you got out, but you are not sure where it is going next so you wait, perhaps it might fall further…
  • But then the market goes up even further and now you have missed getting back in again and now you are upset about your losses and you hope the market will fall again and so you wait some more
  • And this could go on for months or years and you would still be sitting in cash – or like many investors, you capitulate and go in at higher prices than when you got out…
  • And if you think this whole scenario does not happen, look at the 2nd graph below which is the same fund but from just before the 2008 crash where the market fell around 45%…and then it recovered more than 300% over the next 6 years – there are some people who are still sitting in cash…they missed all of it.

I think that the final points are as follows:

  • Investing takes time
  • There are going to be times where things get really volatile but that’s the price you pay for long term inflation beating returns
  • If we bring this back to your portfolio and use the same dates as the first graph above…and we take the N Fund which is kind of a proxy for global markets then the fund was at $85973 on 16 March – it moved back up to $94232 on the 17 April – that’s just under 10% growth over that period…at the same time, the offshore money market fund gave you a return of 0%…I know that this is a really short period but it illustrates my points above

So, if you want to move to cash, I will help you do that, but I can’t tell you when the right time to get back into the market will be (no one can) and my advice would be to stay where you are – your funds are well diversified and you have enough cash (local and offshore). When you sell your property, we can review what we do with that money.

Hope this is helpful – let me know if you would like to chat on the phone

Take care

Gregg

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