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Don’t let the markets fool you

It’s the long term that matters.
The greatest risk to one’s wealth over the long term is not volatility but inflation. Image: Shutterstock

As a long term investor, you cannot avoid taking risk. In order to grow your money meaningfully ahead of inflation over many years, you have to be exposed to markets that are inherently volatile.

In the short term, this means there is a risk that your investments could lose value. Over the long term, however, that volatility is what gives you the opportunity to earn significant returns.

The only risk-free investment is putting your money in the bank. This might ensure that you never lose any of it, but over the long term, this will not give you much real growth.

As the graph below illustrates, R1 invested in cash over 89 years would only have grown to be worth the equivalent of R2 in 1929 money. The same rand invested in the local stock market would have grown to be worth the equivalent of 270 times more.

Source: Old Mutual MacroSolutions

It is worth noting that this graph starts with the Great Depression. For the first three years of this time frame, cash in the bank would have significantly outperformed any stock market investment. It would have seemed like an incredibly good idea at the time to avoid shares.

Within just a few years, however, stocks would already have delivered massive outperformance and that would have continued to be the case ever since.

The silent killer

There are two significant factors at play here. The first is the biggest risk that many investors fail to recognise.

Over the long term, the greatest risk to your wealth is not the volatility of the stock market or downgrades to South Africa’s credit rating. It is that you fail to insure yourself against the silent threat to your money – inflation.

You may feel secure that the R100 you put in the bank last year is still R100 today, but that would be ignoring the fact that it is no longer has the same value … R100 today is not worth the same as R100 was 12 months ago.

You can no longer buy as much with that same money.

At an inflation rate of around 4.5%, your R100 would now be worth the equivalent of R95.50. And this decrease in value compounds over time. Your money progressively becomes worth less and less, unless you invest it in a way that it will grow ahead of inflation.

That requires you to take the short term risk that comes with investing in the stock market, because over the long term you can’t afford not to. As the below graphic illustrates, cash has historically only just beaten inflation in South Africa. In the stock market, however, investors have seen meaningful real returns.

Source: Old Mutual MacroSolutions (to December 2017)

There is no substitute for time

The second vital consideration is that the benefits of being invested in the stock market do not play out over a few years. On the contrary, investing in shares can often seem like a pretty bad idea. The Great Depression is an obviously example of this, but the JSE’s performance since 2014 is another.

Over the last five years, the local market has only beaten inflation by around 1.5%, and has underperformed cash. On that performance there would appear to be little to recommend it.

Since 1924, however, the JSE has gone up in a calendar year more than twice as often as it has been negative. In 64 of those years, the market has shown a positive return – and it has only gone backwards in 31.

In fact, the local stock market has delivered a return of more than 10% in a calendar year more often than a negative one. What this means is that, over the long term, returns from the stock market actually become fairly reliable.

The below graph illustrates the best and worst real return (after inflation is taken into account) from the stock market over a range of periods from 1924 to the end of 2018. At that point, the JSE had not beaten inflation for five years. Yet any investor whose time horizon was at least 20 years had never seen their money lose value.

Source: Old Mutual MacroSolutions

Significantly, given a time frame of 20 years or longer, JSE returns have been in a fairly narrow, and predictable band.

On average, investors who kept their money in the stock market for at least two decades have seen their wealth grow at 7% above inflation.

Nobody can guarantee that this will continue to be the case, but history has been a reliable guide. Even in the current environment, returns have fitted well within the long term pattern.

This is an important consideration for long term investors. The value of the stock market – whether locally or globally – has been proven over time. Underperformance in the short term needs to be seen in that context.



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The headline of this article should read “Don’t let the local fund managers fool you”. Money is pouring out of local fund managers and heading offshore in a massive way and local asset managers are desperately trying to prevent more investors cashing in their investments.
This article makes no mention of EWC, Eskom and NHI (and other negative factors) heading the way of local investors. Foreign investors–who are better informed in most instances–have withdrawn R500 bn from our local market over 5 years, and they have been spot on with that move.
I notice that Old Mutual’s Macrosolutions is the sources of the stats in this article. Let me remind readers that it was the same crowd, who at the beginning of 2019, went countrywide with its prediction that the JSE will be one of the best, if not the best, equity market in 2019.
Well, at the end of the year it, together with Hong Kong, was the absolute laggard with a return of 8% versus Emerging Markets with 18% and Developed Markets at 25%.
Let’s not even mention the Nasdaq with a return of 34% and some tech sectors returning 40-50% to shareholders.
And this has been the case over 5-10 years now.
I feel sorry for the local investors in the Old Mutual Investors fund with R13bn under management (its biggest fund). Well, over 5 years the average annual return was 1,3% per year…far less than the management fee of 2,2% per annum.
So, local investors, you can keep on listening to local fund managers or you can take matters in your hands and get some offshore investments. Cheap, local asset swap funds have returned 15% per annum over the past 5 years. It’s your money and your pension…do something.

True…investors would have been better of with a simple money-market account in USD/GBP/EUR or exchanged their ZAR for Gold.

Respectfully disagree:
Investors probably would not have been better off with simple money market accounts in USD/GBP/EU. In fact they would have done pretty poorly if you take into account the relatively high interest rate they could have earned in South Africa (except perhaps USD). This is the reason why ZA bonds are so popular with international investors.

Change in exchange rates over the following periods to end 2019:

Annualized (USDZAR)
10 year: 6.7% p/a
5 year: 4.0% p/a
3 year: 1.0% p/a
1 year: -2.1%

Annualized (GBPZAR)
10 year: 4.5% p/a
5 year: 0.5% p/a
3 year 3.1% p/a
1 year 1.1%

Annualized (EURZAR)
10 year: 4.2% p/a
5 year: 2.3% p/a
3 year 3.2% p/a
1 year -4.2%

The gold price chart does not make much sense. Using NewGold ETF as a proxy gold price in ZAR:

10 year: 10% p/a
5 year: 9% p/a
3 year 10% p/a
1 year 15.5%

Obviously one needs international diversification, but be careful of anchoring to the idea that changing ZAR into USD/GBP/EUR is an easy way to preserve your wealth.

The All-Share yielded a return of 12.05% and Emerging Markets(General Equity) yielded a return of 12.15% during 2019. Just an FYI

Since May 2001 – 31 December 2019; the JSE All Share averaged 13.88%, S&P500 8.5% and Emerging Markets 12%

In addition, we have received foreign net flows into South Africa over the past 5 years as well. As in foreign inflows have exceeded outflows. Again, just an FYI 🙂

Financial virgin – you sound like a sheep. How can you outperform when you do what everybody else is doing? Be greedy when others are fearful. No safety in the crowd. Time will tell.

Well then you must be at least 50% in Zim? no?

I like being greedy when everybody else is greedy. It’s called Momentum Investing and it beats the living daylights out of being contrarian. How do returns over 20-25% per annum over the past seven years in technology, health care and demographic funds sound like? Oops, don’t have any of those in SA.

The sentiment here is hard to fault, but the necessity to diversify wealth into international investment markets has been totally overlooked… Investing offshore with a locally regulated and credible truly independent asset manager based offshore can be easily accessed via many independent financial advisors based in SA…with transparent and reasonable minimum entry levels and fees…

The only risk-free investment is putting your money in the bank.”
Not true. Bank can and have gone bust.

A bank deposit, even if the banks remains liquid, incurs a certain loss, it is not a risk-free investment after taxes and inflation. Gold is as close to risk-free we can get, but taxes are problematic here as well. Inflation is the investors’s biggest ally and the saver’s biggest enemy. When we understand that inflation is government policy, then we can align our position with that of the government. Inflation is a stealth tax on consumers as it takes the spending power of money and hands it over to pay down government debt. The investor who borrows money to buy assets that are inflated by government actions is enriched by the process that impoverishes the vast majority.

People are not impoverished by an “unfair” and “exploitative” financial system that dumps them in debt. The opposite is true. The wealthiest individuals, the one per cent, are the most indebted and are the largest borrowers by far. People get poor for two reasons. Either they do not borrow enough, or they buy consumer goods with borrowed funds. People who buy assets with borrowed money become wealthy. It is through this process that the one per cent distinguishes themselves from the 99%. They never intended to become part of the one per cent, the Reserve Bank created that situation. Any Reserve Bank is a wealth redistributing institution. This institution rewards those who take on debt to buy the right assets, and it punishes those who don’t.

Leveraged investment strategies require superior risk-management models because investment risks escalate in relation to the leverage. Property investors (and hedge funds) are leveraged investors. This is how they benefit from inflation.

Another gem of clarity from Sensei. Thanks. This is wholeheartedly absorbed. First, I am going to look into levering some of my investments.
Second, to give investors some ideas about how to align their assets with government policies, in the case of SA, it looks like solar, gas and wind power will be the new frontier of investments here, judging by CR’s article in the daily maverick. In the case of the USA, Trump’s trade war is a hostile engagement with China which is going to escalate. The Americans have grown concerned with China’s expansionist ideas – her Silk Road initiative and the aircraft carrier islands in the South China sea. America’s response will be economic disengagement with malfecient China and bolstering the economies of the Pacific rim to ward off China. I am not sure what one could invest in – one would have to do some research – but investing in the Pacific rim may be a good addition to one’s portfolio, especially over the coming years. The SPDR S&P Kensho New Economies Composite ETF may be a good one – it has lots of US defense stocks, which may be worth it if anything kinetic starts to emerge, but the tech aspect is where US strength lies and so investing in this particular one is in my mind a good idea. (locally, that actuary at Syngia offers it – although I am in no way aligned with them or anything like that)

Sanlam stayed local and its share price increased from R 7 to +R 70. Old Mutual couldn’t wait to get out there and its share price, well????? Also think about the 2007 First World bank loan crisis. So rather side with the devil you know than the one you don’t.

Momentum wanted 3% and wanted you to wait 10 years to see returns. I am now 77 years of age. How would a person survive on that and at that age who would want that much anyway.

Possibly the least instructive data one could use to make this point is that of Old Mutual. Once I noted that, I have to completely disregard the validity of the article.

I’m not sure I understand your objection. The data is historical fact. It doesn’t matter who compiled it.

Hey Pat, I think the problem here is that OM has just got such a dismal name now that ppl turn off as soon as you mention them

Also, you did kind of apply some ‘creative accounting’ when you stated if you put R100 in the bank:

“At an inflation rate of around 4.5%, your R100 would now be worth the equivalent of R95.50. “

Not true !

Last year I had my money with Nedbank in a money market fund and was getting around 8% [ forget the name but it was ‘Prime Income Fund’ or something ], going to sleep every night very nicely not having to worry about flat lining JSE/crashing stocks ala Steinhoff etc

Do the math – sure, not shooting the lights out but the net return after inflation was still waaaaay better than most active managed local funds

Yes perhaps,,Oh did Old Mutual’s Macrosolutions ever admit they completely failed their investors?

As usual, like economist that are always right and dont like being called on their “forecasts” gone wrong.

Dear Patrick
The data shows a return on JSE of 14% per annum for 89 years.I quote from a recent Moneyweb article… The FTSE/JSE All Share Index (Alsi) was up 12% for the year, which was close to 8% above inflation. This is higher than its historical average of just more than 7%.
Could you please expand why the difference?

Sure – the difference is the inflation rate. Over 2019, inflation was lower than South Africa’s historical average.

Over the 89 years discussed in the other article you mention, inflation averaged just under 7%. So a 14% average market return over that period is 7% above inflation.

In 2019, however, inflation will probably come in around 4%. So a 12% market return is a real return of 8%, and therefore above the historical average.

@Patrick Cairns

Your ….inflation…….. figures !!!?

Shaking my head…

Well, this is the major elephant in the room

Think about it – stating that inflation was higher in the past, and LOWER for 2019 ?? [ this is especially erroneous considering the robust SA economy pre ‘94 !! ]

And, 2019 happened to be one of the worst years with a crippled economy and skyrocketing goods increases !

Add to the mix unemployment rate increased /currency is still weak overall / GDP is down/property is tanking overall etc etc

The reality is if one had to factor another 2 critical indicators of an economy to the calculations which are usually conveniently ignored, ie, fuel and electricity, then inflation could easily be pegged @ around 8% !

Yes, around 8% – you read correctly

This is the problem with our ‘economists’ and Stats generators of late – just like the Big 3 accounting firms, data is massaged to hide the ugly truth

Sorry, but you are starkly out of touch my friend !

Brilliant article Patrick and Dr Dre you are on the number. It is not like the brilliant past performance from the JSE has come from an ideal environment without risk. There were apartheid, international sanctions, new ANC government without any experience and the list is long. In general international equities are now expensive and JSE is cheap. Has the age old truth of buying low gone out the door? I see no point in comparing last 1,3 and even 5 years performance. Look through the front window.

End of comments.





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