Take longer view of investments than three years

Returns from most major asset classes have disappointed in recent years, leaving many investors doubting their decisions.

Global equity (measured in rands) was the only asset class that gave a healthy margin above inflation over the past three years.

But if you look at the longer-term picture, almost all asset classes beat inflation over almost all periods in the last 15 years.

What’s wrong with three-year returns?

Firstly, for most investors who need capital growth, this time horizon is way too short. Even at retirement we need to be thinking well beyond three years.

Secondly, three-year returns are simply one pointto-point snapshot.

Many investors choose funds based on historic three-year returns.

However, the flaw in this assessment is that it extracts only two days from a volatile market’s history.

From that one number, investors must try to assess the ability of a fund manager who should be focused on making long-term decisions that will achieve returns above inflation.

Thirdly, returns in growth assets are not smooth over shorter-term periods, and even a threeyear number can vary greatly from one year to the next.

Fixating on shorter-term returns masks the powerful effect of compounding that a consistently applied strategy can deliver over time.

Finally, these numbers are backward-looking and have no bearing on the investment opportunity currently available.

We feel better when historic returns are high (even though the market may well be becoming expensive) and anxious when they are low (when, in fact, there may be great bargains to be bought that could generate excellent returns).

This is the biggest problem with putting too much store in historic three-year returns: they do not tell you whether the securities in a portfolio are trading above or below their true value – the most important determinant of future returns.

So is there any use in looking at historic returns?

When considered in context, over the right period and with appropriate equanimity, you can use historic returns to evaluate your strategy and assess if you need to make any changes. It would be valuable to ask:

● Am I looking at the right time horizon for growth assets? It is unlikely to be three years.

● What have the asset classes done over this time? – what was available for me to build my long-term investment strategy?

Investments take place in a changing environment.

● Do I have enough diversification, or should that part of my strategy be adjusted?

● Do I have enough invested in growth assets?

The evidence favours long-term exposure to equities, preferably in a combination of domestic and global firms.

● Sure, cash looks great with hindsight. But is it practical and tax efficient to even think about being all in cash? How would I get the timing right to go back into growth assets?

● What did I miss out on and can I learn from this?

An example would be government bonds, which have offered the opportunity to invest at 3% to 5% above inflation over the past few years, but were scorned by many investors because of sentiment.