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How to grow your real wealth

There are no substitutes for diversification and time.

CAPE TOWN – Most people underestimate the impact of inflation. Although we might see prices rising from year to year, it’s difficult to get a feel for the real effect over time.

To illustrate how inflation erodes the value of your money, consider what R10 000 would be worth in today’s terms if inflation stays at 6%. In ten years, it’s buying power would have diminished to the equivalent of R5 584, and in 20 years it would be down to R3 118. In other words, at the upper end of the South African Reserve Bank’s target inflation band, your money loses just less than 70% of its value in two decades.

“And as we know, very few people actually experience 6% inflation,” adds Graham Tucker, portfolio manager at Old Mutual’s MacroSolutions boutique. “If you have children at school or are paying medical costs, you are a experiencing a higher rate of inflation and your money is eroding even faster.”

It is therefore critical that any investor thinks about growing their money in real terms. In other words, seeing returns above inflation. That is the only way in which you are actually growing your wealth.

In this respect, MacroSolutions does a lot of work looking at the historical returns from different asset classes, and their expected returns going forward. This sets the framework for putting together portfolios that will meet the objectives of generating real returns.

Critical in this is selecting the right mix of asset classes. The below chart illustrates the historical annualised returns after inflation of the main asset classes available to local investors between 1929 and 2015.

It also shows the return of the MacroSolutions Balanced Index over this same period. The index is not one of the boutique’s funds, but a theoretical representation of the typical asset allocation of a pension fund.

Annualised real return since December 1929 – December 2015


Source: Old Mutual Investment Group, MacroSolutions


As would be expected, equities have offered the highest returns, and cash the lowest. However, there is more to this story.

Using the long term average returns of these asset classes, MacroSolutions is able to calculate how long it would take to double the real investment value of one’s money. In South African equities, this would take nine years. In cash, it would take 92 years.

Using historical returns, it is also possible to plot how often an asset class has been the best performer over any calendar year. Looking only at the local market, equities are the best asset class 48% of the time, while cash wins only 13% of the time.

In other words, while you would see the best returns from equities every second year, cash is only the best place to have one’s money in one year out of eight.

“Different asset classes work at different points in time,” Tucker says. “Equity is not always the best performing, but it wins in the long term. If you leave your money in cash you might feel good in the one year that the market falls, but you are going to miss out the rest of the time.”

The below graphic shows how different asset classes have performed relative to each other over the last 50 years. Over the very long term, it is clear that equities show consistently high returns, while cash has given the lowest.

In the shorter term there is more variance, with different asset classes performing in different years.



Source: Old Mutual Investment Group, MacroSolutions


What is evident, however, is that the balanced solution consistently delivers returns in the top half of the table and ahead of inflation.

“This is why having a diversified portfolio is key,” says Tucker. “Asset classes move around a lot and its hard to predict what is going to be the top performer in any one year, but a balanced solution puts you in the top half consistently.”

Macrosolutions believes that this will continue to be the case, but that investors should expect lower returns in general over the next five years. The below graphic shows their outlook for different asset classes from 2016 to 2020 against their historical returns.



Source: Old Mutual Investment Group, MacroSolutions

Note: Global equity returns are shown in US dollars so do not take currency movements into account.


What is evident is that South African bonds are the only assets likely to offer returns noticeably above their long term average. The outlook for cash and global equities is marginally positive, but this is more than offset by the much lower returns investors can expect from the local equity market.

“While a 4.5% real return might seem attractive from local equity, historically you have seen 7.5%,” says Tucker. “What has happened is that the fantastic returns we have seen in equity from 2009 have actually stolen returns from the future.” 

Even given this slightly more subdued outlook, however, investors with a long term plan will still be well served by a well-diversified portfolio. The critical thing is however to stay invested and give your money the time to grow.

“Nowadays you get bombarded with information on an hourly basis,” says Tucker. “But you are not going to get rich quick out of investments. Everyone has a friend that made a lot of money in this or that in a very short period of time, and that sort of thing will happen. Even a stopped clock is right twice a day. But if you want to have the best chance of growing your real wealth, that takes time.”

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why do they make easy things difficult? ONLY question to ask “do you believe investment returns in sa will be higher than off-shore returns over the next 10 or whatever years?”. anyone who answers YES doesn’t need a financial planner they need a PSYCHIATRIST!

If the question is about what one believes (i.e. accepting some assertion as true) then why and how would that indicate something psychiatric?

It will be higher than Sydney property.

Don’t be ridiculous, Robert. I think we need the shrink.

I also think you forgot (maybe never knew) the basic finance 101 lesson concerning risk and return. South Africa is perceived as a risky investment destination thus the required return for investing in South Africa is HIGHER than in many offshore (a gross generalisation) destinations if we assume ‘offshore’ means low risk countries i.e. not the likes of Iraq, North Korea etc. Since the required return is higher in South Africa, South African assets (including bonds) will be priced (i.e. heavily discounted) to accommodate this. Cheap in other words.

Conversely a while ago some African government official told the audience at a conference that investors in his country were making “huge” returns. I then told him that this was nothing to crow about- all it did was confirmed the high sovereign risk associated with his country. When there is a plethora of low return investments taking place we know that his country has joined the ranks of the civilised. Lower returns are associated with investors bidding assets up in a low risk environment.

If you believe I am wrong you are always welcome to short South African assets and make yourself rich. I understand you are in a situation to do this.

BTW beliefs are the domain of religion.

However does the increased risk and return on local investments adequately compensate for above-inflation electricity increases, municipal taxes, cost of water shortages (whether due to weather or crippled infrastructure) and ‘Social redistribution expenses’? I would say not.

“And as we know, very few people actually experience 6% inflation,” adds Graham Tucker. Ironically, the examples given by Graham Tucker contradicts his assertion (that few people’s inflation is less than 6%).
The reality is that in SA, few people have medical aids (or access expensive medical treatments) and few people send their kids to ‘expensive’ schools and therefore a majority of people do NOT experience inflation higher than 6% AS PER THE EXAMPLES ABOVE.

To be fair those people also have no money to invest, so his article actually makes sense.

I must be dyslexic because every time I see the word “boutique”, I immediately see “rip off”

Although the Merriam-Webster dictionary confirms it with the definition of “a small store that sells stylish clothing or other usually expensive things”

End of comments.





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