The Ghana Stock Exchange (GSE) has had a terrible year, to put it lightly. The market is down 19% for the year and before we put all the blame on COVID-19 or an upcoming election, let’s remember that the market was down 12% last year as well. In fact, assuming 2020 ends on a negative note this would be the fifth time in the last six years that this has happened.
When you’re dealing with bear markets like this, the strategy is to either hold in expectation of making up your losses in the long run or to buy more in order to take advantage of depressed stock values. However, this becomes difficult when you are invested in the market through an equity fund.
An equity fund is a mutual fund which has a significant exposure to stocks in its portfolio. I am a fan of using such funds as the primary way to invest in stocks on the GSE because they allow you to indirectly own a large number of stocks, thus diversifying your stock portfolio. However this does not mean that equity funds do not have disadvantages. And the disadvantage I want to talk about in this post is the significant withdrawals that occur in situations where the market has suffered big losses.
Unfortunately many investors in equity funds do not understand that when they withdraw their money as stocks are falling they are
- forcing the fund manager to turn paper losses into real money losses because they have to sell the stocks to finance the withdrawals of customers; and
- denying the fund manager the opportunity to buy shares at bargain prices.
What this means for investors like myself who hold on to equity funds in losing years is that we do not get the benefit of long-term holding which we would ordinarily have enjoyed when markets rebound.
The onus is on equity fund managers to explain to their clients that losses are to be expected, even for periods as long as 5-10 years, as stocks are generally volatile investments. They also need to stop stressing on the idea of the right time to buy to potential clients unless they are also going to tell them about the right time to sell. This could mean that they will lose a lot of potential clients but it would also mean that they will retain the investors who are really seeking to invest long term.
“They also need to stop stressing on the idea of the right time to buy to potential clients unless they are also going to tell them about the right time to sell.” This point I agree with. The strategy of what to do if the market is falling is never discussed until the moment the market is falling and that is the moment that giving reasonable advice becomes difficult for people to digest.