Long Term Investment
We’re now into the last quarter of 2022 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, we ensure that we do the best that we can for our clients at all times.
A few years ago I wrote an article after attended a presentation at Old Mutual 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 pertinent today as they were then. Here they are.
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 (Our upper target in South Africa) 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 95 odd years cash has generated a real return of approximately 1%. Now if our standard of living increased by the official CPI, this may be sufficient.
Unfortunately, the cost of living that we actually experience is way higher than this “official” number. 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. It is 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 side-lines 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.
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. Although we do have a minor percentage of our clients’ monies in index-linked funds the majority of their monies are actively managed. Right now, these managers have and are delivering for us in market fraught with negativity.
Some interesting numbers so far for 2022
Inflation as at 31 August 2022
Market returns for the period 01 January 2022 to 26 September 2022
I have just had a look at my own investment which is in the MPowered CPI +6% Targeted Solution, our most aggressive solution, and that is sitting at -7,71% for the year to date. This is somewhat better than the majority of the indices above.
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.