INVEST LONG TERM OR NOT AT ALL
South Africans who have been investing over fiveor 10-year periods since 1995 have rarely lost their money, according to an analysis of investment yields conducted by Old Mutual Investment Group’s Macro-Solutions division to determine what risks South African investors face.
The information is contained in the recently released edition of the yearly publication Long-Term Perspective.
The research was conducted to determine what the chances were that investors will experience negative yields if they invest over certain periods of time because, with investments, it’s not guaranteed that investors will experience positive yields.
The analysis makes it clear that, as the risk of a negative yield increases, the shorter that period of investment becomes.
The longer the term of the investment, the lower the chances are that there will be a negative yield, and, given the yields over the past 22 years, there is almost no chance of a negative yield over a period of five or 10 years.
In contrast, there is a 38% chance of a negative yield over a period of a month, 30% over a quarter, 20% over a year and 3% over three years.
According to MacroSolutions, this is why it’s so important to take a long-term view when it comes to investments.
The accompanying table shows that investors sometimes experience negative yields over a period of a year, but, over longer periods, the yield was almost always positive and, in many cases, attractive, even when inflation is taken into account.
In this regard, an investment in shares last year and in 2015 would have delivered negative real yields (inflation taken into account), but investors will still see steadier positive real yields over longer periods of time. An investment in shares over a period of five years still delivered a yield, in real terms, of 6.9% a year, 3.9% over 10 years and 7.1% over 20 years.
In nominal terms, shares earned 13% a year over five years, 10.5% over 10 years and 13.9% over 20 years. Some asset classes are more erratic than others, but it usually turns out that, where a class has a negative yield in a particular year, it will recover the following year. This emphasises the need for investors to have a long-term outlook.
For example, South African stocks achieved negative yields in 2013 and 2015, but, in both cases, recovered well the following year and, over a fiveyear period or longer, still delivered real yields.
The same goes for gold, which, in 2013, showed negative nominal and real yields, but performed well over the following two years.
It’s also clear from the table how much weaker the real yield on cash is when compared with other asset classes. Over the past five years, cash earned just 0.9% a year in real terms, while shares beat inflation by 6.9%, property by 11% and international shares by 16.8%.
The longer investors sat with cash, the less they would be able to achieve financial independence.