With equities, time is your friend

Many investors invest in cash because they fear they could lose money if they invest in equities, but cash delivers poor real (after-inflation) and after-tax returns.

If you can leave your investment in equities for more than three years, history shows there is very little risk of incurring a loss on your capital once you calculate your average annual returns over the entire period.

Old Mutual’s data also shows that, although the equity market’s longterm trend is up, in nearly one out of every three years investors have earned a negative real return, as was the case last year and the year before.

However, periods of poor or negative real returns are typically followed by a strong recovery. Long-term Perspectives points out that in 2008 the equity market lost 30 percent in nominal (beforeinflation) terms, but in the following five years equities returned 14 percent a year.

Another key lesson history teaches us is that the price you pay for the profits a company can generate, the valuation or price-toearnings ratio (PE) of the company, is an important determinant of the returns you can earn. The equity market swings between being cheap and expensive relative to its long-term average, and the more expensive it is when you invest, the lower the subsequent return you earn.

If history is any guide, the PE is currently in the most-expensive of five price bands in which it has traded over the past 56 years for which data is available. This suggests that you may continue to earn lean returns in the years ahead if you invest across the broader market at these prices.

Old Mutual predicts that real returns in the years ahead will be lower than the 6.9-percent real return that equities have delivered over the past five years.