Dipping in and out of equities could be more risky

However, moving in and out of equities haphazardly could be far more detrimental than riding out the tough times. This is because missing out on a strong calendar year or even a couple of strong market days could significantly reduce the returns from holding equities over time.

A recent study undertaken by PPS Investments indicated that missing out the best 10 days in the market over a 20-year period would have halved investors’ returns from holding equities, while missing out on strong calendar years would likewise have been equally detrimental.

The same also applies to trying to time allocations to managers. The ASISA statistics referenced earlier indicate that investors frequently chase manager performance. Typically, funds flow from managers that have recently underperformed to managers that have recently performed well.

Again, such behaviour can be detrimental to generating returns. This is shown by findings of a well-known US study that was conducted on the Magellan Fund managed by the famous Peter Lynch from 1977 to 1990. While over this 13-year period, the fund delivered an average return of 29% per year, the study found that the average investor over this period actually lost money despite the phenomenal returns delivered by the fund.

They concluded that the main reason for poor returns achieved by the average investor was the tendency to withdraw from the fund during periods of poor performance only to reallocate capital after periods of success.

It is therefore critical for investors to maintain a suitable allocation to equities in order to meet their inflation targets over the long term, as well as backing managers through periods of short-term underperformance.