Staying invested trumps chasing performance

Investing can often be a roller coaster ride of emotions, with market volatility and the constant influx of financial news influencing decisions. However, one of the most solid pieces of advice in investing is to stay the course. Navigating the complex financial landscape, where last year’s unprecedented rate hikes, persistent inflationary pressures, and geopolitical uncertainties dominated headlines, requires a strategic and measured approach to investing.

The attached graph illustrates a compelling reason for this strategy: the potential benefits of long-term investing.

The graph compares the performance of two investment strategies from December 2015 to December 2023. The first strategy, represented by the darker line labeled “Optimum BCI Equity Fund,” shows the growth of an investment that remained consistently invested in the fund. The second strategy, indicated by the lighter line labeled “Picking Last Year’s Winner,” represents an investor who chases performance by selecting funds that did well in the previous year, instead of staying invested in a single fund.

From the graph, we can observe that the Optimum BCI Equity Fund experienced fluctuations but ultimately grew from around R100 to R173.4. In contrast, the performance-chasing strategy had a more volatile journey and ended at R132.0, significantly underperforming the consistent investment strategy.

This visual evidence underscores a key investment principle, staying invested over the long term can smooth out short-term fluctuations and lead to greater compound growth. Here are a few reasons why investors should consider maintaining their investment positions:

Compounding Returns:

The effect of compounding can turn a modest initial investment into a substantial sum over time. As the investment generates returns, those returns are reinvested and begin to generate their returns, and so on.

Market Timing Is Challenging:

Attempting to time the market can be a futile endeavor. The best and worst trading days often occur close to each other, and missing out on just a few of the best days can significantly reduce overall returns.

Volatility Can Be an Opportunity:

Market downturns can be unsettling, but they can also present opportunities to buy more shares at lower prices, which can be beneficial when the market rebounds.

Diversification:

A well-diversified portfolio can weather market storms better than one chasing last year’s winners. Diversification can help reduce the risk of significant losses.

Emotional Investing:

Making investment decisions based on emotions, such as fear during downturns or greed during upswings, can be detrimental to long-term returns. A disciplined approach to staying invested helps to avoid emotional decision-making.

The graph tells a story of patience and discipline in investing, which are virtues that can often lead to a more favorable investment experience. Demonstrating that, while chasing performance might seem tempting, it doesn’t pay off as much as a steady, committed investment strategy. So, for those looking to build wealth over time, the graph serves as a visual reminder of why it is important to stay invested and resist the urge to chase after the next big thing.