What goes up will come down and what comes down will go up. Clearly, this is the lesson that many South African investors still need to learn about the the nature of the markets.
This week interest rates dropped by another one percentage point making up a full 3.5 percentage points since the first drop in June. This is good news for South Africans who are deep in debt, but bad news for people living on fixed incomes.
Simultaneously, the FTSE/JSE All Share Index (Alsi) has made a 36 percent recovery since April 30, going from 7322 to 9991 at its peak on Thursday, before falling back to 9435 at the close of trade that day. And while all this was happening, many people who moved holus-bolus out of the stock market towards the end of last year into money market funds have locked in their losses.
An indication of the move is that unit trust fund investments are currently 31 percent invested in equity funds and 35 percent invested in money market funds.
This means that people who ran for the cover of money market funds have suffered a double whammy. They have lost out in the recovery of equities and are now saddled with lower interest rates, which can be expected to go lower still.
Recently I was at a presentation when a speaker said that the best indicator of what not to do was to follow the advice of the media, which only starts promoting market sectors when they are at or near the top of their cycles.
Fortunately, I could point out to the speaker that this was not the case with Personal Finance and offered him a free subscription so that he could keep up with the times.
In a column on the front page of Personal Finance on April 12, two weeks before the FTSE/JSE Alsi hit its 12-month low, I warned investors about the dangers of moving into money market funds, pointing out that no one should be attempting to time the markets by switching between asset classes.
This was my advice at the time:
"If you originally devised an investment strategy based on a properly diversified investment portfolio and did not fall prey to attempting to time sectors of the market, there is no reason to be pulling out of either local equity or foreign-denominated funds. In fact, the best thing you can do now is add to your investments while maintaining a balanced approach using equities, bonds, cash and property. Ducking for cover by pulling out of investments, particularly equities, and transferring your money into a money market investment, will merely lock in what are currently only losses on paper.
"If you continue to invest in a broad range of investments, you will be well placed when markets recover. The trick is to dribble money into the markets. If you place everything into money market accounts and wait for recovery, you are likely to miss out on the equity market upswing. Recoveries are often very rapid and if you are not in at the start, you will lose out.
"It is impossible for anyone to predict with any degree of certainty whether markets will continue to drop or when they will recover. However, market values by all measures are lower than they have been in many years, here and abroad. Foreign investments look particularly good at the moment with the rand in its current strong position.
"It is the foreign investments that probably provide the best lesson. When the rand was hitting its lows against major currencies and foreign markets were booming, South African investors generally were frantic to get their money offshore, allowing financial services companies to ratchet up costs against a background of limited availability of foreign investments. But nothing could deter these investors."
All that was true five months ago and is true today.
Invest on a continual basis
Investment is a long-term affair, during which time markets will go up and down. The trick is to invest on a continual basis and not to switch your investments around.
Interest rate cuts should not be seen as a signal to start spending or borrowing more. If you have debt, keep paying off your debt at the same levels. That way you will save a lot by ridding yourself of debt sooner.
If you are planning major debt, such as a homeloan, make sure that you will be able to afford higher repayments, when interest rates go up again - as they surely will.