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The ultimate low-risk, high-return investment

If you give it enough time.
A recent analysis has again illustrated the impact that making an emotional decision during periods of market turmoil can have. Image: Shutterstock

Over the past 25 years, the JSE has been through three major downturns. There was the emerging markets crisis in the late 1990s, the dot-com crash in the early 2000s, and the financial crisis that hit in 2008.

Despite these setbacks, the FTSE/JSE All Share Index (Alsi) delivered an annualised return of 13.6% between January 1996 and November 2019. At an average inflation rate of 5.8%, this means that investors have earned real returns of 7.7% per year.

This is an outstanding outcome for long-term investors. However, it’s likely that not everyone earned it, because to do so you had to have the stomach to sit out these events.

From peak to trough in 1998, the Alsi fell 43.8%; between March 2002 and April 2003 it dropped 36.8%; and in 2008, it took just six months for the index to lose 46.4%.

The scale of these crashes would have scared many investors out of the market. They would have seen their investments rapidly losing value and withdrawn them to save themselves further pain.

Looking over the horizon

While this would have given them some short-term comfort, it’s worth appreciating the long-term impact of these kinds of decisions.

“Using recent past performance as a proxy for future investment returns appears entirely reasonable,” notes the head of research at PSG Asset Management Kevin Cousins.

“However, at crucial points in the market cycle – typically when valuations are at extremes – basing investment decisions on recent historical returns can lead to very poor outcomes.”

To illustrate this point, PSG looked at what would have happened to the value of an investor’s money if they had withdrawn it after each of the three market crashes since 1996, and only re-entered the market a year or two later. The results are illustrated in the graph below.

Source: PSG Asset Management, Bloomberg

An investor who stayed out of the market for one year after each crash before putting their money back in would have seen a real return of only 2.7% over the full period. In nominal terms, they would have a little more than a third of the money they would have had if they had stayed invested throughout.

Someone who withdrew their money and kept it out of the market for two years on each occasion would only have earned just more than inflation. Their total would be less than a fifth of what they could have had by leaving their money where it was.

“While this is a stylised example – we have not included interest earned while out of the market and did not deduct any fees or transaction costs – it clearly illustrates the impact that making an emotional decision during periods of market turmoil could have,” Cousins points out.

Making sense of the market

While this focuses on major market downturns, investors should think about the wider lesson as well.

Historically, over any rolling five-year period, the JSE has never delivered a negative return. Over any rolling 10-year period, it has failed to deliver an above-inflation return only 5% of the time.

This shows that the risk of losing money for a long-term investor in equities is low.

The potential gains from staying invested, on the other hand, are high. Over the last 90 years, the market has produced an annualised return of 13.8% per year. That is double what has been available from cash.

As the last 25 years illustrate, however, these returns never come in a straight line. There are periods when the equity market can seem highly unattractive, but over the long term it has consistently delivered.

Even in the current environment, in which the Alsi has only barely beaten inflation over the past five years, the annualised 10-year gain has been 10.8%. That represents a real return of more than 5.5%.

Read: Every day on the JSE in the last 10 years in one chart

Investors should bear this in mind when considering their current strategy. Returns from the stock market must be evaluated over long time horizons, not months or even a few years. It may seem more comfortable being in cash at the moment, when returns from shares are uncertain, but one shouldn’t ignore where the long-term prospects are better.

As Cousins argues: “We believe that for most investors, selling multi-asset funds that have delivered poor recent returns and buying income funds that have delivered excellent recent returns may reduce return volatility, but will actually raise more significant risks. There are two reasons for this: firstly, income funds have insufficient exposure to the risk assets necessary to achieve targeted returns over the long term; and secondly, reducing asset class diversification raises your portfolio’s vulnerability to changes in the economic environment.”

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COMMENTS   30

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The JSE has done it then and it will continue to deliver returns going forward. America has had an unprecedented run that’s taken money away from other markets worldwide. We have dynamic people and with the launch of the Africa free trade deal, our South African companies will generate superior returns once more! Open your wallets and accept the prosperity that is coming your way! And hold your SOUTH AFRICAN flag high and accept the honour and privileges that we are blessed with! We have the best country in the world!

Hi Dad ape. I love your positivity ! My wallet is already open thanks to SARS and they have accepted the prosperity that is coming their way. I will be following your advice and will be holding my South African flag up high as soon as Eskom switches on my lights again, since I currently cannot distinguish between my and my neighbour’s poephol in the pitch black dark.

This article is very misleading Patrick…you dont mention at all the reasons the JSE rebounded from these events, or the conditions in the country during that time period. Previous market crashes you refer to such as “dot com” and 2008 were well weathered by SA due to Mandela/Mbowenis handling of the economy during the early 2000’s, excess and cheap power inherited from the pre-94 goverment, a positive sentiment from the worldwide investment community towards SA due to stability created etc. During 2008’s crash SA was protected by the run-up to the world cup. Now we have a “failed Eskom” which will take decades to repair, record unemployment and UNEMPLOYABLE people as a result of a broken education system, uncertain and increasingly unstable property and business rights, ineffective state organizations, a broken SAA….the list goes on. To cap it all, there is a concerted effort to oust Gordhan and CR which is gaining momentum…why; because they are trying to do the right thing. There is ZERO chance the JSE will rebound under these conditions, and the article is very carefully avoiding these crucial differences over past time periods. The Zimbawe of 30 years ago with all it’s wealth, farming goods and strong economy is not the Zimbabwe of today…..no matter how well their economy performed from 70s – 90’s. Use all periods of rand strength to get money offshore!!!!

Good point. There is no sun-setting of BEE (the economy killer). Past performance is no indicator of future performance.

I will only invest offshore, in USD.

kul jou hier en kul jou daar en siedaar!!

great wizardry of fin advisory, never wrong.

Dadape, I have admiration for your religion. What is the name of the CHURCH you’re referring to?

It sounds like you’re very much into the teachings of “prosperity gospel”? Amen to you! 😉

(Correct, for a cadre looter, SA must be “the best country in the world”)

To be positive about predicting a bright future requires a premise of repeatability.
But what happens if there is a fundamental change in the underlying assumptions?
Can an investor live long enough to recover from Zimbabwe?
The Nikkei is still down from its 1989 high of ca 38 900 by ca 40%. Who can wait that long?
A stock exchange can only promise returns based on profitable companies and not over-paying for your investment.
I don’t trust the ANC government to create a climate for profitable business.

I think Dadape is pressing other bloggers buttons because this cannot be serious.

Just to mention other countries also have dynamic people and they also think that they live in the best country in the world.

@Dadape….you know, contrary to most knee jerk reactions to your comment here, I do agree with you on certain points of yours

Yes, we DO have some GREAT fantastic people holding this country together

And YES, there is so much potential..!

But…..

Unfortunately….

Those in power here, are intent on destroying what was once one of the greatest nations on earth !!

Period.

This is only true for investors who are in a market ETF.

Just prior to the 2008 crash you could have been holding persetel, educor, didata, homechoice, LTA, etc. Had you stayed in…..poof.

All gone

It also seems that, in order to make money on the JSE, you need for shares to crash from time to time. What a lottery it has become.

Simulations are pointless – what if our investor were a cautious non-greedy type and sold six months before every crash, reinvesting six months after each crash…

Timing market highs and lows like Johan Buys is suggesting can only be done with the benefit of hindsight.
The optimal way in which the average living annuitant can get the benefit of rising markets without suffering too much from crashes, is to allocate the equivalent of (say) two years income to an active income fund and the rest to a balanced fund, maybe divided between SA and a Rand denominated off-shore fund.
While the going is good, draw the monthly income mainly from the balanced fund. After a serious dip, draw only from the active income fund and allow the balanced fund to recover.

Yes. This works for me. Offshore equities are better, I think, because when offshore equities weaken so does the rand. Hence losses are limited.

Interesting to note from a technical perspective that since 2000 price action on the ALSI40 has only bounced of the 80 period moving average 3 times when looking at a monthly chart.

It obviously ties in with Patric’s dates above. 2003, 2009 and very interestingly end of 2018. So maybe things are looking up??

Just concerned about all the real dogs in the TOP 40 these day’s.

If one is talking about SA dual listed shares, fine, but the rest depend on the SA economy, and that means spending power, a stable environment in which to do business, confidence in goverment and in the future prospects of ZA, with a dysfunctional audit profession guarding the investor. Did I forget to mention Escom, the ANC’s cadre deployment and BEE?
If resources were left out of the picture, these graphs would be very different.
What are the prospects for the South African economy over the next 10 years (long term), in all honesty? Investments in shares are by necessity long term.
Sorry to pee on your positivity, but is what it is.

The average investor who lives off the value of his pension fund is squeezed between a market that has been sideways for almost 6 years, while the cost of living has engulfed him. The same phenomenon is responsible for both the stagnant market as well as the rising cost of living. Administered costs like electricity, rates and taxes and various taxes pulled up the handbrake of the All-Share Index, while it stole the spending power of citizens. The explosion in administered costs is the direct result of ANC redistributive policies. It is clear that the spending power of the average saver was expropriated without compensation and disappeared into Luthuli House.

Take note that it was not the EFF who stole our money, no, it was the ANC! The current president does nothing to control administered costs and still we all see Malema as the risk?

Agreed.

That’s what CR is good at. How to get a slice of someone else’s pie. To create a pie? Never.

The often blank expression has a good reason.

BEE is all about a slice of existing pie (value intercept at a premium) not creating new value.

EFF is fighting to take over the scraps left by the ANC.

69 years old. No debts. Running a small home based business (R6000 net). Small annuity (R5000). Saving R500 per month into Nasdaq100 (Satrix) and trying to buy the smallest Kruger coin whenever possible (trying to hedge against future hyper inflation). Transfered 70% of TOP20 investments to Nasdaq100 and MsciWorld index. Hoping that my decisions taken is correct????

Dilip – I bought some 1/10 Krugers a long time ago and I find that they are difficult to convert to the correct cash value. I would rather save up for a full Kruger

Mr Patel, you will outperform 99% of fund managers. I would rather buy the Newgold ETF instead of the coins though. If you own ETFs with exposure to the share market you don’t have to worry about the effect of hyperinflation. These ETFs will provide a hedge against possible hyperinflation, the same as gold. Even if hyperinflation never arrives, normal inflation will still reward you.

Already colluding for a smooth transition.

Mr Patel I salute you.

As Sensei has commented below,SA Corp is further being punished by our Chief-Frog-Boiler

Sorry, but don’t expect ANYTHING to change for the better while under cANCer

The reality is CR’s murderous economic policies being signed off under his watch are in fact tantamount to treason !!

Period.

And is being reflected in business confidence…which is affecting the local market…which reflects on our battered listed local shares

No rocket science here piglets

Today we have the ZAR weaken to above R14.80 per USD. At the same time the dollar index (DXY) is weakening. This can be defined as an ANC decoupling moment.

The ANC policies are the same as those of Lenin’s Soviet policies. It’s even kept the same name, google it, democratic centralism.

What happened to the Soviet union? We cannot expect a different result here just because it’s our home.

End of comments.

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