8 LONG-TERM LESSONS

BUILDING AN INFORMED SOLUTION

Analysing long-term data is crucial to our investment process and it also teaches us some profound lessons. Understanding these lessons will help you build the right investment solution to achieve your goals.

LESSON 1

INFLATION IS YOUR ENEMY

REALITY:

Many investors suffer from “inflation illusion” as they don’t notice how destructive inflation can be over time (see INFLATION research on page 17).

LESSON:

We need to look at long-term investment returns in “real” terms, stripping out the impact of inflation.

INFLATION ERODES SPENDING POWER

Take a look at what a 6% inflation rate effectively does to your money.

Inflation Graph





Ronald Reagan Quote

LESSON 2

TIME IS YOUR FRIEND

REALITY:

The main reason investors prefer cash to equities is the fear of losing money.

LESSON:

The best way to manage the risk of losing money is to remain invested in equities for longer. As soon as you extend your holding period for more than three years, SA equity past performance shows that the chance of losing money becomes negligible. Take what happened in 2008: after a negative 30% return, the market rebounded to deliver 14% a year over the following five years (see Chart 13).

PROBABILITY OF NEGATIVE RETURNS OVER DIFFERENT TIME PERIODS


Negative Returns Graph

1 day and 1 week: Rolling total returns for SA equity,
June 1995 – December 2018

1 month to 10 years: Rolling returns for SA equity, January 1960 – December 2018

The old ADAGE holds true

Adage Quote

LESSON 3

YOU NEED EQUITIES

REALITY:

Many investors will not retire with enough money.

LESSON:

We need the higher long-term returns from equities to grow our wealth. This is particularly important in a world where people are living longer.

LESSON 4

CASH IS TRASH

REALITY:

A bank deposit exposes you to minimal risk, but there’s a price to be paid for that security

LESSON:

Cash does not significantly increase your real wealth over time. Over 94 years, cash has an after-inflation return of just 1% a year. It is better to own shares in the bank than to leave your money there.

TIME NEEDED TO DOUBLE YOUR MONEY

Using each asset class’s long-term average returns, this is how long it will take to double your REAL investment value

SA Equities
SA Bonds
SA Cash

PERFORMANCE OVER 89 YEARS (nominal returns)

Performance over 89 years

Quote

LESSON 5

COMPOUNDING IS A POWERFUL WEALTH GENERATOR

REALITY:

Money needs time to benefit from the full potential of compounding growth.

LESSON:

Start saving as soon as you can, leave it for as long as you can, and let compounding do the work for you. And tick the dividend reinvest box on your investment application form to maximise your growth.

GROWING YOUR WEALTH OVER TIME

Using the long-term nominal average return of 13.8% a year, look at what happens when a lump sum is invested in SA equities over time

Growing Wealth Over Time

LESSON 6

HIGH PRICE OF MISSING OUT

REALITY:

Short-term volatility can often lead to investors selling their investments at the worst time – as almost all of the 10 best days on the JSE occurred after bad news or during uncertain times.

LESSON:

Sitting on the sidelines and missing those good days can be detrimental to your savings. The only thing you can control is to have a well-considered plan and to stick to that plan. It is the best way of ensuring you have a secure retirement

THE HIGH PRICE OF MISSING OUT

The performance of R100 invested in the FTSE/JSE All Share Index (June 1997 to December 2018)


Missing Out Graph

LESSON 7

DON’T PUT ALL YOUR EGGS IN ONE BASKET

REALITY:

Equities may have been the best performing asset class since 1929, but cash was the best performer for 11 of those 89 years and listed property for 9 years…

LESSON:

Diversification is the one free lunch in investments; use it. That is because it pays to invest across different asset classes. The analysis of drawdowns on page 13 shows the benefit of blending different asset classes, while on page 15 you can see the consistent, above-average returns of the diversified MacroSolutions Balanced Index over time relative to other individual asset classes

PERCENTAGE OF TIME AS THE YEAR’S BEST PERFORMING LOCAL ASSET CLASS (1930 – 2018)


Lesson7 Values

LESSON 8

ACTIVE ALLOCATION ADDS VALUE

REALITY:

Asset classes have distinct secular or long-term periods of under- and outperformance.

LESSON:

Active asset allocation is a vital tool in delivering superior returns.

UNDERSTAND THAT MARKETS MOVE IN CYCLES


Listed Property Icon 
LISTED PROPERTY
went nowhere for 15 years, before becoming the best performing asset class for the next 20.
 SA Bonds Icon
SA BONDS
delivered a negative real return for 40 years, before delivering a great return over the last 30 years.

CONCLUSION

We incorporate these lessons into the way we build our solutions:

  • They all have real return targets.
  • They all invest in growth assets.
  • They are all well diversified.
  • They all employ active asset allocation strategies.
  • We recommend a minimum holding period for each solution - the more exposure a fund has to equities, the longer the recommended investment time.
  • We hardcode long-term thinking into our investment process.

These principles also form the basis of Old Mutual Wealth's investment philosophy, enabling them to deliver to client objectives.