Investment returns have been sluggish and disappointing over the last two years for most South African investors. This is frustrating and is testing investor patience. So, what do you do?
Go back to basics and answer a few easy questions:
- Why am I investing?
- Where should I be investing?
- Do I have the right investment strategy that suits me?
Why am I investing?
To protect your savings, you need to put them somewhere that will enable them to grow above inflation. In South Africa, the standard is around 6% per annum. To achieve this, an investment needs to grow by 8% at least, before tax. If it doesn’t, your hard-earned savings will decline in real terms. Today, R60 buys four loaves of bread. The same R60 will buy only three loaves in five years’ time. It’s for this reason that savings need to be invested in order to at least maintain value (buying power).
Where should I be investing?
To achieve at least 8% per annum before tax over time, you cannot leave your money in the bank with a guarantee. Yes, currently, you can get a fixed-interest return of +8% from some banks, but when this investment is released after 5 years or more, it’s likely you would have missed out on valuable higher returns that you will never get back without taking undue risk. (See Coronation’s view below).
To achieve a +8% return over time, you will need to invest in some growth assets. With this, comes risk. The best place to achieve this growth is an investment in equities (the stock market), which has given an annual average return of 16% (8% real – after inflation) over the last 50 years.
The amount you invest into equities depends on your investment horizon and is largely governed by your risk profile. This is because equites produce varying levels of return over time. Over the last 8 years, equities have returned an annual average of 16%. However, this comprises a return of only 2% p.a. over the last 2 years, but a 21% p.a. in the previous six years.
Patience is required and the best place to invest is in a premium suite of unit trusts that has provided superior returns, over time.
Do I have the right investment strategy that suits me?
Have I identified my goals properly, assessed my tolerance for risk and matched this to my investment portfolio? This can be achieved by doing a comprehensive financial plan, evaluating your risk profile before investing in the appropriate diversified portfolio of unit trusts that takes into account the right asset allocation.
Stay the course with your strategy as a change often results in moving at the wrong time and losing out essential market gains when you least expect it. (See important points from the Coronation article summarised below).
Conclusion
Although these may be obvious questions to most investors, it’s important to answer them to give one peace of mind. Remember:
- Ensure that you have the right investment strategy to achieve your goals. We will formulate a financial plan for you to ensure that you have the right investment strategy.
- Be patient. Time is always an advantage. (see Coronation summary below).
- At Investonline, we believe that these low market returns will pass. This is the natural course markets take after the abnormal returns from 2009 to 2015.
- We are confident that our recommended portfolios will continue to produce outperforming returns.
Coronation Article
In an article from Coronation, they address the importance of investing for long-term capital growth. Here are the salient points:
You will get your best returns the longer your time horizon. Time will give you your best advantage.
Diversification through time. This allows you to hold more growth assets longer which reduces risk. Time gives you the opportunity to recover from poor performance more easily, avoiding missing out on market recoveries that often happen quickly and unexpectedly.
The steady performer delivers the lowest value-add. Studies have shown that a more volatile performer has produced better returns over time. Such an observation re-affirms that patience is critical when investing.
A frightening statistic is, since 1960, investors who were not invested in the SA equity market for 13% of those trading months, received a zero return over the 56-year period.
Financial markets turn when you least expect them to and, their movement is not correlated directly with economic growth per an article from Allan Gray.
Diversification with a flexible asset allocation drives better risk-adjusted returns. Investment markets are not static and new opportunities arise in different asset classes (equities, bonds, property, offshore).
Realistic expectations are necessary. For many reasons, real returns over the next decade are likely to perform below average. In the 10 years to the beginning of last year, the average balance fund returned an average 13% p.a. (5% p.a. above inflation). Over the next 10 years, Coronation expects balanced fund returns of 10% (2.5% to 3% above inflation).
Please click here to read the full article – Investing for Long Term Capital Growth