If you are an aggressive investor in growth assets, you’ll be excused if you open your March quarterly statement and think someone has played an April fools’ joke on you. I reckon the period since November was the toughest 5 months for investors in the last decade. Only the big financial crisis of 2008 was tougher, but then at least listed property was still hanging in there. Looking at the chart below, it is clear that growth funds had very little hiding place over the last couple of months.
We are currently, not unexpectedly, receiving piles of e-mails concerning the performance (or rather, lack of performance) of clients’ investment portfolios. Most of the people contemplating the idea of rather stashing their cash under their mattress, are investors who have not yet been exposed to a full market cycle. Five months is however a fairly short period and it is relatively easy to respond to these queries with clever sayings and long-term data findings. But what does one say to someone who has invested shortly before the financial crisis in 2008 and is now looking at his or her figures? This person can rightfully note that their 10-year figures on their growth assets are by no means even slightly aligned with the realistic expectations over such a period provided to them by their financial advisor or any article at the time.
To get a better grasp of growth asset investment and hopefully some insights into making decisions regarding your own future investments, we need to flip back our calendar to 1995.
The South African Stock Exchange’s long-term (100 year plus) return is around 7% above inflation (including dividends). During conversations with prospective clients who wanted to invest in growth assets (mainly shares), this figure would have been a good starting point to capture expectations. If you’ve accepted that fund managers and other intermediaries should outperform the index to such an extent that they at least cover their own fee, coupled with your experience of inflation at that point (approximately 8.5% annually), you would be expecting an average rate of return between 15% and 16% per annum over the long-term.
We all know inflation isn’t static, so you should adjust your nominal growth expectancy relative to the increase or decrease in the long-term inflation rate. In the graph illustrated below you can see the JSE’s total returns (including dividends) between 1995 and 2017.
Red and green bars: Annual JSE returns (including dividends)
Grey line: Rolling inflation + 7% expected long-term return
Black line: Customer’s rolling average return (invested 1 January 1995)
Here are a few interesting facts relating to the graph that might be useful when you are in the process of financial decision-making:
To conclude: If you have time on your side and you are invested in quality growth assets and your fees are within limits, try to relax if you are slightly behind schedule. Make sure you understand your relative performance rather than absolute performance. If your timeline is long enough, your outcome relative to inflation (although it doesn’t always feel like it) should be relatively predictable. However, no one (not even esteemed advisors or flashy financial commentators) can predict the order of returns.
Andró Griessel is a certified financial planner and the managing director of ProVérte Wealth & Risk Management.
Follow him on Twitter @Andro720911. He writes twice a month for Netwerk24.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.
True to company culture, Samuel strives to build solid long term relationships with clients and has a meticulous way of identifying needs, defining goals and compiling an executable plan to reach one's goals. He firmly believes that one has to be a specialist in one's field to be able to add value, and continuous training & education is therefore paramount. To be objective and to have an independent approach to a client's planning is critical to make a difference.
Born & bred on a farm in the Montague region, Samuel matriculated in 2001 from Montague High School. He completed his BComm Honours degree in Business Management as well as his Postgraduate & Advanced Diploma in Financial Planning. Samuel is a CFP charter holder. Apart from a short stint at an agricultural company Samuel has spent his whole working career with ProVérte. Samuel is a shareholder and valuable member of the board of directors of ProVérte.