Spectacular claims are very misleading
Why do investment funds make spectacular marketing claims with no reference to the actual purchasing power of the currency, adjusted over time?
I have been investing into a retirement annuity for 30 years and I am quite satisfied with the investment performance. This is because I have always been aware that projected maturity values are meaningless, because they are seldom adjusted for inflation. The same applies to claims of past performance.
For instance: “The Old Mutual Investors’ Fund – in which R339.79 invested at inception 50 years ago would be worth R1 million* today”. (The asterisk with footnote pointed out that commissions and tax had not been deducted from the investment growth numbers).
No doubt the claim is correct in purely numerical terms. It represents a profit of more than 294 000 percent. All very well and glamourous, but while R339.79 will scarcely pay for a basket of groceries today, in September 1966 this paltry sum had the purchasing power of about R24 600 in today’s money, after adjusting the figures by monthly consumer price index inflation. Not quite such a tiny sum to invest for 50 years then.
Also, R1 million in 1966 would have purchased what would require more than R72 million today. So the numbers are meaningless unless described in terms of the purchasing power of the time.
Using an inflation calculator (www. inflationcalc.co.za) let’s re-write the investment claim, using time appropriate figures. In September 1966: “R339.79 invested at inception and left in the fund for 50 years is projected to be worth the future value equivalent of almost R14 000 by the year 2016.”
This would have been recognised as an excellent real return, because in 1966 you could buy an average suburban house for R14 000. In September 2016 a more realistic description of past performance might be: “The 1966 value equivalent of R25 000 invested at inception 50 years ago would be worth more than R1 million today.”
The descriptions indicate a real return of 4 000 percent over half a century – an impressive, above inflation, yearly average return of just over 7.5 percent when compounded annually.
Historical rand values, while not incorrect in numerical terms, are both fantastic and meaningless when viewed across half a century of inflation. Marketers who quote these are misleading because they imply that a seemingly meagre investment made 50 years ago has increased – in real terms – by almost 300 000 percent, which is clearly ridiculous.