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Are higher long-term returns worth the volatility?

The financial rewards for being comfortable as an investor are the same as the physical rewards for sitting on the couch.

Equity markets are inherently volatile. That’s the price one pays for the higher returns offered by growth assets. You can’t enjoy the benefits of exercise without some sort of discomfort, because being out of breath, sore, or tired is the sign that you’ve put in enough effort to deserve a reward. It’s the same with investing – the financial rewards for being comfortable as an investor are the same as the physical rewards for sitting on the couch.

The price you pay for higher long-term returns is in the form of uncertainty, confusion, short-term loss, surprise, stretches of boredom, regret, anxiety, fear, etc. You have to pay the bill. Warren Buffet put it simply: “Until you can manage your emotions, don’t expect to manage money.”

Over the past five years, the volatility that an investor has had to endure in the South African market has been frustrating: 2017 and 2019 were years of reasonable returns while 2016 and 2018 were years of poor returns. This has led to an all-round disappointing return over the past four to five years for a South African investor.

The graph below shows the range of local equity returns in a given year on an after-inflation basis, since 1960. Over the 59-year period, 34% of the time the equity returns have been negative, whilst 66% of the time the return has been positive. We can also see that the positive returns are on average greater than the negative returns.

Source: Corion Report    

Investors who are investing for retirement (i.e. most investors) should think of their retirement phase lasting for at least a 30-year period. Over such a long period of time equity returns are historically attractive. Over any one- to three-year period (this is seen as a short-term period for equities), the returns can be disappointing. The uncommon occurrence of a prolonged poor return over the past five years should be seen in context of the expected returns over the long term.

Historically, the greater long-term returns from equities have invariably been worth the emotional cost in the form of volatility.


Jesse Morgans

Asset Protection International


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