How to invest in the best and worst of times!

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18 March 2022
We are certainly living in unprecedented times.

COVID-19 shook the entire globe causing massive panic and uncertainty in global financial markets. Who would have thought that almost two years later the world would be caught in another period of great uncertainly and financial turmoil, with Russia invading the Ukraine.

Global pandemics, wars, stock market crashes and even climate change events are nothing new in mankind’s history. Scrolling through the pages of history over the last 100 or so years we find many examples of devastating events that rocked the world and financial markets alike. World Wars, invasions, a global financial crisis, Tsunami’s, terror attacks and COVID-19, to name but a few. 

Each of these events brought great uncertainty placing enormous financial stress on global financial markets, investors and ordinary citizens. However, following each of these disastrous global events, economic recovery returned and investors were handsomely compensated for their patience during what might have seemed like the worst of times in history. 

Unfortunately, what we also learn from history is that nobody seems to learn from history as people tend to make the same emotional decisions with their money in the worst of times. Instead of riding out the storms, investors tend to fear “Armageddon” cashing out their investments at the worst of times and suffering great financial loss.

The same holds true in the best of times. When economies are strong and things appear to be going well, almost too well, investors tend to forego prudence and invest when markets are over-valued and expensive, thinking that things will never go bad again. Not learning from history.

Investing money through the best and worst of times, requires a solid investment plan, patience, consistency and a little something I favour, known as rand cost averaging. 

 

The following example demonstrates the principle of rand cost averaging.

John invests R 1000 p.m. in a unit trust over four months. During this period the investment markets experienced good and bad times. When the price of a unit trust drops it normally signals bad market conditions and when it rises it’s a sign of good market conditions. 

Month

Amount invested

Unit price of the Unit trust

Units bought

Total number of Units owned in the unit trust

Total value of Investment

January

R 1000

R 1 per unit

1000 (R1000/1)

1000

R 1000 (R1 x 1000 units)

February

R 1000

R 2 per unit

500  (R1000/2)

1500 (1000 + 500)

R 3000 (R2 x 1500 units)

March

R 1000

50c per unit

2000 (R1000/0.5)

3500 (1500 + 2000)

R 1750 (0.5 x 3500 units)

April

R 1000

R 2.5 per unit

400 (R1000/2.5)

3900 (3500 + 400)

R 9 750 (2.5 x 3900 units)

 

John invested R 1000 p.m. consistently into a balanced unit trust. During the good times (Feb and April) he bought less units but during the bad times (Jan and Mar) he was able to buy more units (without having to contribute more money), and was generously rewarded when the good times returned. Ironically it is during the bad times that opportunities abound to create long-term wealth. One just needs to be brave and stay invested.

If John only invested in the good times then he would have had the following result: 

Month

Amount invested

Unit price of the Unit trust

Units bought

Total number of Units owned in the unit trust

Value of Investment

January

R 0

R 1 per unit

Bad Times so John stayed away

0

R 0

February

R 2000

R 2 per unit

1000  (R2000/2)

1000

R 2000 (R2 x 1000 units)

March

R 0

50c per unit

Bad Times so John stayed away

1000

R 500 (0.5 x 1000 units)

April

R 2000

R 2.5 per unit

800 (R2000/2.5)

1800 (1000 + 800)

R 4 500 (2.5 x 1800 units)

 

If John only invested in the bad times the picture is as follows:

Month

Amount invested

Unit price of the Unit trust

Units bought

Total number of Units owned in the unit trust

Value of Investment

January

R 2000

R 1 per unit

2000 (R 2000/1)

2000

R 2000 (R1 x 2000 units)

February

R 0

R 2 per unit

Times seemed too good so John stayed away

2000

R 4000 (R2 X 2000 units)

March

R 2000

50c per unit

4000 (R2000/0.5)

6000 (2000 + 4000)

R 3000  (0.5 x 6000 units)

April

R 0

R 2.5 per unit

Times seemed too good so John stayed away

6000

R 15 000  (2.5 x 6000 units)

In all these examples John invested a total of R 4 000 over the four month period, just differently for the sake of illustration.   

In a perfect world, investing substantially only in the worst of times can create great long term wealth. Investing only in the good times is less favourable. However nobody knows with certainty when times will be good or bad. Hence investing through both is more prudent.

A solid investment plan is one that considers your individual circumstances and invests consistently through both the best and worst of times as well as investing more in the bad times, to take full advantage of lower investment prices

 

 

Gareth van Deventer CFP®

OUTsurance Life and Investments: Head of Technical Advice Support 

 

 

OUTvest is an authorised FSP. All investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Ts and Cs apply.

 

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