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THE FLIP SIDE OF THE COIN

Casparus Treurnicht

Portfolio Manager

July 2020


The common rhetoric of active fund managers and financial advisers on investing in stock markets is that what matters most is time in the market rather than timing the market. In making this statement, it would be disingenuous not to interrogate it from all perspectives. The most commonly presented perspective currently is: How much do investors stand to lose by not being invested in the market on the days that delivered the highest positive returns?


From 30th June 1995 to 30th June 2020 the All Share Index (J203T) returned 13.33% per annum. To put this into perspective, if you invested R100 on the 30th of June 1995 in an index fund that matched this return, that R100 would have accumulated to R2,288. This is the return you would have earned by just staying invested. Let us extend the hypothesis further; if you were going to try and time the market, you could have done some serious damage. At the risk of stating the obvious, it could also have enhanced your investment returns. This is why:


These are the ten top- and -bottom days over the last 25 years:


Missing the top ten days would have reduced your annualised return to 10.52%. That is 2.81% less per annum than being invested in the index. Thus, your R100 would have grown to R1,220. Missing the top ten days would have cost you R1,068 (R2,288 minus R1,220). That is a drawdown of 46.66%! Enough to make people reconsider timing the market and convince them that it is indeed time in the market that matters…?


There is a flip side to this coin: let us suppose you were lucky enough to miss the bottom ten days. Your R100 would have amounted to a massive R5,204; you would have earned 17.11% per annum. That is an additional return of 3.78% per annum, or R2,916, than if you had just stayed invested in the index. This investment is now worth 127.46% more than being invested in the index. Yes, it is more than double - compounding contributes to this.


Take note of the degree to which the bottom ten days surpasses those of the top ten. Why does this have such a major impact? Let us suppose you had R100 invested on a day where the market declined by 10%. To get back to R100, the market needs to rise by 11.11%. Equivalently, if the market drops by 50% over a certain period, we need to see it bounce back by 100% to get back to R100. While missing the top 10 days would be disappointing; missing the bottom ten days would be radical.


So, the argument is that if you try and time the market, you could land up missing the top ten days. By staying invested for the top 10 days, you sign up for the bottom ten days as well. What about being able to identify primary cycles (ignoring the noise and dissonance of secondary cycles) and being able to ride the wave when it’s rising but step off onto the harbour when it’s destructive.


If you are of the opinion that this cannot be reasonably and sustainably achieved; think again! The Gryphon multi asset funds focus on the preservation of capital, using data-based indicators to exit equity markets and ride out volatility in alternate asset classes. As you’ll see from the graph below, this has certainly proven to be a viable philosophy over a period of time.


If, however, you choose to spend uninterrupted time in the market rather than trying to get the timing right, exposure to equity markets via an index tracker funds will have given you a consistent, cost-effective ride for your coins.

Investors looking beyond mainstream investment options will be delighted by the opportunities of affordable, transparent investment strategies that do not compromise performance returns.


In conclusion, some wisdom from Red Foreman of That 70’s Show, “Responsible people don’t go around getting their nipples twisted!”


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