Long Term Investment

Aug 6, 2019, 19:47 PM

06 August 2019, by Colin Horwitz

We’re now well into the last half of 2019 and to say that it has been an interesting year so far would be a gross understatement. I am privileged to be able to speak to many people on a daily basis and these discussions are with people that span the whole spectrum of our society and who represent many professions, positions in business, owners and shareholders in various business entities. The common thread is that everyone I speak to has the same story. “Things are tough and we are a lot worse off financially then we were a few years ago.”

Whilst a large part of the blame can be laid squarely at the feet of our politicians, looking back does not solve the problem. So, the question is what do we do from here on? Not so easy to answer. All we at Morebo know is that we can only do or influence things that are within our control and as we are in the business of investing money on behalf of others, that we ensure that we do the best that we can for our clients at all times.

I attended a presentation at Old Mutual recently and their presentation was entitled Long Term Lessons  - Building an Informed Solution. The take away from this was summarised in what they called their “8 Lessons” which are as follows.

Lesson 1 – Inflation is your enemy
Most investors do not notice how destructive inflation can be over time. Long term investment returns must be measured in “real” terms. That is the growth above the inflation level. Using an inflation number of 6% per annum means that your buying power of R10000 today becomes R5584 in 10 years from now and R3118 in 20 years.

Lesson 2 – Time is your friend
Research shows that the main reason that investors prefer cash to equities is the fear of losing money.

The best way to manage this fear or risk, is to invest in equities with a long-term investment horizon. The statistics on SA equities show that as soon as you extend your holding period for more than 3 years, the chance of losing money becomes negligible.

Lesson 3 – You need Equities
It is a sad fact that most South Africans will not retire with enough capital. A portfolio needs the higher long-term returns from equities to grow wealth. This is extremely relevant today as people are generally living longer.

Lesson 4 – Cash is Trash
The statistics show that the over the last 94 years cash has generated a real return of 1%. The take away here was that it would be better to own shares in the bank than have your money in cash with the bank.

Lesson 5 – Compounding is a powerful wealth generator
Compounding is the effect that one gets from receiving growth on a growing capital (capital plus returns) amount. The earlier one begins to save the more you will gain as the compounding effect does the work for you. Its also important to ensure that dividends are re-invested into your investment.

Lesson 6 – High price of missing out
Short or medium-term volatility often leads to investors cashing in their investments at the wrong time. This can lead to one missing out on the good days as, according to the report, almost all of the best 10 days on the JSE occurred after bad news or during uncertain times. Sitting on the sidelines and missing out on those days can be detrimental, especially if that fear of losing money kicks in and one sells when the market is low.

Lesson 7 – Don’t put all your eggs in one basket
Diversification is extremely important and it definitely pays to invest across different asset classes. To this end it is important to understand the appetite for risk so as to ensure peace of mind. By blending the asset classes we also build in protection against the downside.

Here is a percentage of time as the year’s best performing local asset classes between the years 1930 to 2018.

SA Equity 47%
SA Gold (1967 – 2018) 17%
SA Bonds 14%
SA Cash 12%
SA Property (1980 - 2018) 10%

Lesson 8 – Active Allocation adds value

Active asset allocation is a vital tool in delivering superior returns as they have distinct periods of under or outperformance. An example of this is SA Listed Property. It underperformed for 15 years before becoming the best asset class for the next 20 years. SA Bonds also delivered a negative real return for 40 years before becoming the darling of stable real returns for the next 30 years.

Average annual performance for the years 1930 – 2018 per class was,

SA Inflation 6%
SA Cash 6,9%
SA Bonds 7,8%
SA Equities 13,8%

Using this as a yardstick the time it would take to double your investment in these asset classes are,

SA Cash 87 years
SA Bonds 42 years
SA Equities 10 years

We at Morebo have designed our portfolios to maximise your investment taking into account your appetite for risk aversion whilst always keeping in mind the requirement that longevity is a huge factor in life.

In closing I would like to acknowledge and thank Old Mutual for the extremely informative presentation which I have tried to share with you within the limited constraints of this article. I hope that you enjoyed it.

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