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Old Mutual Investment Group’s Long-term Perspectives 2019
report, released last week, provides eight lessons for investors:

1. Inflation is your enemy. A basket of groceries that costs R1 000 today cost R14 half a century ago. And although you may factor Consumer Price Index (CPI) inflation (currently at about 5%) into your finances, your “personal inflation rate” may be higher, because education inflation and medical inflation have traditionally been four or five percentage points above CPI. At the education inflation rate of 9.2%, one year’s tuition and boarding at a top private school, which would currently cost about R215 000, will be R518 000 in 10 years’ time.

2. Time is your friend. Time allows you to be mainly invested in growth assets such as equities, because the longer you are invested, the lower your chance of negative returns. Taking rolling returns of South African equities between January 1960 and December 2018, the probability of a negative nominal return from South African equities over a month was 38%; over one year it was 20%; and over five years it was zero.

3. You need equities. Over long periods, equities have proved to be the best-performing asset class and the one most likely to outpace inflation. At the recent launch of the report, Zain Wilson, portfolio manager at MacroSolutions, said this holds true in stock markets across the world, from Tokyo to Wall Street.

4. Cash is trash. A bank deposit exposes you to minimal risk, but there is a price to be paid for that security, the report says. Cash does not generate real wealth over time, and is useful only as a place to “park” assets in the short term. In the period under review in the report, the time it would have taken to double your money in real terms is as follows: South African equities, 10 years; South African bonds, 42 years; and South African cash, 87 years.

5. Compounding is a powerful wealth generator. By combining the performance of equities with the magic of compounding, you can achieve amazing results. Using the long-term nominal average return of 13.8%, a R1 000 investment in South African equities would grow to R3 646 in 10 years and R13 290 in 20 years.

6. The price of missing out is high. At the launch, Old Mutual Investment Group head of retail distribution, Gontse Tsatsi, said short-term volatility can often lead to investors selling their investments off at the worst time. “Long-term data shows that almost all of the 10 best days on the JSE since 1997 occurred after bad news or during uncertain times,” he highlights. “Sitting on the sidelines in an asset like cash can mean missing out on the upswing,” he warned. The report shows that if you had invested R100 on June 1, 1997, and stayed invested, it would have grown to R2 320 by the end of last year. By missing the best 10 days, it would have grown to less than half of that: R1 068.

7. Don’t put all your eggs in one basket. The diversification provided by a balanced fund can reduce your risk over the short term while detracting little from equity-like returns over the long term, the report shows. Plotting the probability of beating inflation and the probability of negative returns over time, the MacroSolutions Balanced Index is markedly lower than equities over periods up to three years, while closing the gap with equities over four and five years (see graph below).

8. Active allocation adds value. Markets move in cycles, with different asset classes having distinct periods of under- and over-performance, the report says. For example, listed property went nowhere for 15 years before becoming the best-performing asset class for the next 20. Experienced asset managers understand these cycles and are best positioned to exploit them.