For people who want to start saving and building an investment portfolio it is important to understand that savings and investments are two different concepts. Savings refers to money put aside with the purpose of using it for something specific in the future. Savings often has a short-term purpose, such as going on holiday, buying a new TV or paying for a birthday party. It can have a long-term purpose as well, for example saving money for a deposit to buy a new car or home or to pay for your child’s education. The important factor remains i.e. saving to pay for something specific.

Investments come into play when you want to create and build a portfolio of wealth. Investments refer to money put away to create wealth with a long-term view in mind. When you invest, you start buying assets to generate income in the future. Investing for the longer term is an important aspect to keep in mind when you want to build a successful investment portfolio with the aim to maximise returns.

Looking at how the various different asset classes performed over the last 20 years, as illustrated in the tables below, it is once again emphasised why investing becomes more beneficial over the longer term.

 

  Yearly Returns Long-term Returns (P.A)

Real Returns in Rand

*

 2018 2017 2016 2015 2014 Last 5 years Last 10 years Last 20 years
SA Equity -12,5% 15,5% -3,8% -0,1% 5,3% 0,4% 6,9% 9,3%
SA Property -28,5% 11,9% 3,3% 2,6% 20,2% 0,4% 6,4% 12,9%
SA Bonds 3,1% 5,2% 8,2% -8,7% 4,6% 2,3% 2,2% 5,5%
SA Cash 2,7% 2,7% 0,6% 1,1% 0,6% 1,5% 1,3% 2,8%
Global Equity 2,1% 6,4% -10,6% 26,8% 10,6% 6,4% 9,4% 3,9%
Global Bonds 10,5% -7,6% -16,0% 23,9% 5,6% 2,3% 0,9% 2,9%
Gold 10,2% -2,6% -10,6% 11,8% 5,0% 2,4% 3,1% 6,7%

* Real returns = actual value of the investment return after deducting tax, inflation and fees

 

  Yearly Returns Long-term Returns (P.A)

Nominal Returns in Rand

 ^

 2018 2017 2016 2015 2014 Last 5 years Last 10 years Last 20 years
SA Equity -8,5% 21,0% 2,6% 5,1% 10,9% 5,8% 12,6% 15,3%
SA Property -25,3% 17,2% 10,2% 8,0% 26,6% 5,7% 12,1% 19,2%
SA Bonds 7,7% 10,2% 15,4% -3,9% 10,1% 7,7% 7,7% 11,4%
SA Cash 7,3% 7,5% 7,4% 6,5% 5,9% 6,9% 6,7% 8,5%
Global Equity 6,7% 11,4% -4,6% 33,5% 16,5% 12,0% 15,3% 9,7%
Global Bonds 15,4% -3,3% -10,4% 30,4% 11,2% 7,7% 6,3% 8,6%
Gold 15,1% 2,0% -4,6% 17,7% 10,6% 7,8% 8,6% 12,7%

^ Nominal returns = the return of an investment before deducting tax, inflation and fees.

Source of tables: Old Mutual Investment Group Long-term Perspectives 2019 Report

Here are some important aspects that the returns on the different asset classes validate:

  • The majority of asset classes can be remarkably volatile (i.e. changing rapidly and unpredictably) on a year-on-year basis showing strong positive returns during one year followed by negative returns the next year or vice versa. This can be seen from the ‘yearly returns’ columns.
  • Looking at the returns over the longer term i.e. last 5 years, 10 years and 20 years the returns proof to be less volatile and more stable. This can be seen from the ‘long-term returns’ columns.
  • Both lower risk asset classes like cash and bonds as well as higher risk asset classes like equities show a steady incline in returns over a longer period i.e. 20 years compared to 5 years.
  • Low risk asset classes like cash has lower returns attached to it and performance is dependent mainly on interest rate increases and decreases. The returns remain relatively stable on a year-on-year basis and also show lesser incline in growth over time. Asset classes like equity and property show a steeper incline in growth over a longer term.
  • A local asset class can reflect positive good returns in the same year when that asset class is not performing well globally and vice versa.
  • In 2017 SA equity and property were the best performing asset classes while global bonds and gold experienced negative growth. In 2018 the exact opposite situation transpired with global bonds and gold been the best performing asset classes and both SA equity and property experienced negative growth.
  • The impact of tax, fees and inflation on an asset class can result in the returns becoming less attractive. This is an important consideration often overlooked by investors. The impact on the various classes is evident when comparing the nominal returns (before tax, fees and inflation) as per the table at the bottom to the real returns as per the table at the top.

Before making investment decisions always do some research, analyse the actual returns and compare different asset classes. The results proof that investment returns are maximised over the longer term. Accept the fact that your investments can be volatile. Don’t panic and immediately disinvest when your investment goes into a cycle of poor performance, the cycle will turn upwards again at some point. The impact of volatility becomes less visible over time. To diversify (i.e. spread the risk by investing in different asset classes and including both local and global assets in your portfolio) your investment portfolio is another important factor to minimise the impact of volatility and to mitigate the risk of certain asset classes not performing well at certain periods.

The article contains extracts from the award-winning book, ‘Financially Fit and Wealthy’. For more information about the book – www.roneljooste.com/financiallyfitandwealthy