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Adjust your expectations for investment returns

And some thoughts on ‘What do I do with my money?’

The number one question I’ve been asked by friends, acquaintances and (sometimes) complete strangers since the President’s swift firing of Nhlanhla Nene as Minister of Finance is: “What do I do with my money?”

(Actually, it might’ve been a tie for first place along with “Should I take my money offshore now?” (at whatever point the rand was at, during its wild gyrations in December)…)

I’m not a certified financial advisor. So I simply cannot offer advice.

And the thing is no one – not even the ‘best’ in the business can know what’s likely to happen this year. Or next. The most we can do is use some methodology to figure out what’s ‘overvalued’ and ‘undervalued’ and what prospects over a given time period for a particular market or equity or commodity are ‘likely to be’. And most will probably still be wrong (but, I’ll leave this for another column for another day).

Since the bottom of the market in 2008 – and most cannot even remember that far back – it’s been relatively easy to generate very decent returns on the JSE. With the market roaring through 55 000 points in April last year, nearly anyone in equities looked a genius. As long as you were relatively well-diversified (but not too diversified), of course.

The problem, as I see it, is that we’ve become accustomed to double-digit returns, especially on the local market. The rand’s steady depreciation since 2009/10 took care of most of that for us. Plus, practically any offshore investment were a ‘sure-thing’. Investing was ‘easy’.

Thing is, I am not convinced we should be expecting returns of over 10% in the short to medium term. There are a lot of signs that the unprecedented bull market we’ve seen since the global financial crisis is closer to its end than its beginning (or over?). The MSCI World Index was flat over the last two years!

And global economic growth is not exactly at record highs. The IMF, in its most recent forecast in October, forecast growth for this year at 3.6%. This was 0.2 percentage points lower than its outlook in July, barely four months prior. With China continuing to stutter, and most emerging markets extremely fragile given the collapse in commodity prices, I’d bet we’ll see a further downward revision soon. The World Bank last week already trimmed its forecast (by 0.4 percentage points!) to 2.9%.

A 10% annual return over the next year or two would be my aim. Hitting that would be a very good result. Anything close to 10% would definitely be satisfactory. Anything more than that would be exceptional. (Of course, something may change and we could have back-to-back years of 20% annual returns; we just don’t know. This is about the expectations you have as an investor.)

So, with expectations adjusted downward, what to do?

Make sure your investments are diversified.

This is one of the fundamental rules of investing, but is often forgotten.

Rushing – especially now (!) – to take all your investments offshore (or to buy only rand-hedges on the JSE) is not diversification. Neither is leaving your total offshore asset exposure artificially limited at 25%, the maximum as per Regulation 28 limits for retirement savings. There’s a balance to be struck, and a lot here depends on whether you’re going to bring those dollars back to South Africa or use them as a global citizen might (and also when you’re likely to do either of these things).

If you have structured retirement savings, like a pension fund or retirement annuity, take into account the limits in terms of asset-class allocations. Then make sure that your other investments offset those and ensure you’re diversified sufficiently. You’re probably significantly more exposed to South Africa than you think.

The obvious problem when you’re ‘overweight South Africa’, your wealth is primarily measured in rands. It is delusional to be celebrating rand-based returns thanks to rand hedges on the JSE, while the currency continues to weaken. You’re effectively going backwards, quickly.

In offshore markets, look for investments and sectors that you simply aren’t able to get access to in the JSE’s (rather) limited investment universe. Tech (duh!). Clean energy. Biotech (fellow Moneyweb columnist Magnus Heystek’s favourite in recent years). Real estate focused on a specific region (any surprises why Intu, Capital & Counties and NEPI are among the darlings of the JSE?). Listed private equity. Infrastructure. Don’t take money offshore and then buy commodities. This isn’t rocket science!

(And these aren’t my recommendations, rather a self-evident list of things you simply cannot get cost-effective exposure to (if at all) in SA.)

I wouldn’t want to pick individual stocks either. For example, picking Facebook and Apple as a proxy for ‘tech’, and getting those calls ‘wrong’ is not a risk I’d be willing to take. Also, owning individual stocks is expensive… Have you tried buying some Alphabet (née Google) stock lately? It goes without saying that you should watch fees and costs, because these could rapidly negate a single-digit annual return. Low-cost index funds will do all the work for you, and there are literally thousands to choose from.

Balance, balance, balance. And oh yes, don’t forget (some!) cash. A guaranteed 8% return over 12 months1 is surely not to be scoffed at… (and use that annual tax-free savings account allowance!)

* Hilton Tarrant works at immedia. He can still be contacted at hilton@moneyweb.co.za.

** Again, this isn’t advice (I’m not a CFP)… It’s common sense!

1 Yes, this is a rate available today from one of the ‘big banks’ in South Africa.

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Hilton, is it not time for the sheeple to worry about the return OF their money rather than the return ON their money?

Good article. For my money, I would take every cent out and invest it in the Vanguard VOO fund. Mainly for four (and there must be more) reasons. The emerging market sentiment is unlikely to change for the better anytime soon. The destructive antics and actions by Zuma will carry on till 2019 and one can expect him to make even more moves that will devalue the rand, create massive unemployment and poverty and promote general civil chaos while corruption will grow by leaps and bounds (he excels in these areas). High interest rates and high inflation are going to kill the economy so expect many businesses to close with all that that brings. Lastly the drought, the drought Zuma says is not a crisis, is going to result in unprecedented shortages of food resulting in hunger across the land and the imported food will costs very much more than current prices. So what does this mean? Probably civil war on a low level. Strikes all over the place. Even a more dysfunctional Zuma ANC and of course a weaker and weaker Rand …………….. Invest in SA at your peril is my view.

The one certainty about financial markets is that very few get them right not even the so called experts.From 2009 it’s been plain sailing and most expected 2015 to be the same but it didn’t turn out that way being rather flat.With the Fed expected to carry on raising rates most expect the market to battle in 2016 but watch they’ll be proved wrong and markets will rise north of 20%.

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