Investment Insights
By: Luke Meiklejohn
Markets reward patience. That's a fundamental trade-off in investing - returns accrue over time, smoothing out the inevitable bumps along the way. Yet, time is a luxury many investors don't have when they put aside funds for near-term goals such as buying a home in two years' time and wanting to maximise their returns and put down a bigger deposit. This temptation is understandable, but history shows that taking on excessive risk in such situations often leads to disappointment, if not disaster.
It starts innocently enough. A would-be homebuyer, seeing equity markets deliver strong returns over the past few years, wonders: why leave money in a savings account while rates are falling when stocks could grow it much faster? The logic is tempting, especially in a world where global rates have only recently become attractive again after years of near-zero returns.
This thinking is reinforced by the fear of missing out. We've all seen the headlines celebrating the extraordinary gains in tech stocks, crypto assets, and other big winners - glossing over just how volatile they can be. The past two years have also been a reminder that markets can move violently in both directions. But for many, the allure of rapid gains tends to overshadow the reality of risk - until it's too late.
Consider an investor who put their house deposit in the S&P 500 at the start of 2022. By October that year, they would have been down almost 20% in rand terms - a brutal setback for someone with an impending goal for that capital. By mid-2023, markets had rebounded, but a crucial problem remains: what if their timeline didn't allow for the recovery?
This is the key issue. A long-term retirement portfolio can ride out short-term market swings, but someone investing with a two-year horizon doesn't have that cushion. If the market drops right when they need the money, they're stuck with two bad choices: take the loss or push back their plans.
We recently took a closer look at South African unit trusts, comparing equity and balanced portfolio strategies to simply leaving money in cash, with the results highlighting why taking on too much risk in a short timeframe can backfire. While stocks and balanced funds do tend to outperform cash over time, there is still plenty of room for underperformance over two-year periods. Over the past two decades, cash has actually come out ahead around 40% of the time over any given two-year stretch. And when stocks did lag, they lagged badly - by an average of 7.5% per year.
Extending the investment period is often the go-to solution for short-term losses, but history suggests it doesn't always work. When stocks underperformed over two years, simply waiting another two years historically only led to outperformance against cash 25% of the time. In these scenarios, stocks still trailed cash by a median of 1.7% per year over the full four-year stretch - leaving investors around 7% worse off than if they had stayed in cash from the start.
There's a reason we at FNB Wealth & Investments focus so much on aligning asset allocation with time horizons and our clients' financial goals. Liquidity matters, and short-term funds need to be protected, not aggressively grown.
While cash and short-term fixed income assets may not offer the thrilling upside of stocks and other risky assets, they provide something just as valuable to an investor's overall portfolio: stability. With the global rate environment still elevated in many economies, risk-free assets now offer reasonable yields, reducing the opportunity cost of staying conservative. 'TINA', the acronym alluding to there being no alternative other than investing in equities, is no longer the theme of the day.
Uncertainty will always exist in investing, and while there's a chance stocks could deliver strong gains over a short period, there's also a meaningful chance they don't. When your goal is short-term and non-negotiable - like a home purchase - certainty is worth more than the prospect of extra upside.
The bottom line
Time is the investor's greatest ally, but only when it's on their side. A short horizon changes the equation, making risk a much more dangerous proposition. Chasing returns with money earmarked for a near-term goal might pay off in a bull market, but when markets turn, it can derail well-laid financial plans. Risk and reward are two sides of the same coin, and our outcomes-based advice framework is there to provide guidance in navigating market turbulence in the journey towards achieving your financial goals.
For those with a major purchase in sight, the best strategy often isn't chasing the highest return, it's ensuring the money will be there when it's needed - no matter what markets do.
