Category Investments

Unsettling times but hold tight … we have been here before

28 February 2018 Steven Nathan, 10X Investments
Steven Nathan, CEO of 10X Investments.

Steven Nathan, CEO of 10X Investments.

Somewhat ironically, each new year launches into the same old news cycle: the WEF meetings at Davos, the State of the Nation (Sona) speech, presentation of the national Budget to Parliament. Those a bit longer in the tooth may feel that it’s all over-hyped – “sound and fury, signifying nothing” – because invariably these events don’t become watershed moments, just brief intermissions that change little, if anything.

This year, Cyril Ramaphosa becoming president has brought a real edge to proceedings. There is the expectation that we will address our problems with real-world solutions not monotone platitudes, and that our stock market will react. So far he has not disappointed.

Although these events, good and bad, may shape investor sentiment, they should not interfere with your retirement planning. In South Africa, hardly a day goes by without an unnerving headline putting you off the country, or the stock market at least. Most likely that will be countered by incredible optimism, often on the same day.

If your investment plan is to wait for calmer waters before getting into shares, chances are you’ll never get onboard … or reach your financial goals.

Many people avoid the stock market because it can seem like a crap-shoot. Contrary to many ‘informed’ opinions out there, there really is no saying where it will go next. It’s a relentless up and down, promising either a quick buck, or a whole lot of remorse. No wonder so many industry terms have their origin in gambling.

Figure 1 shows the annual return from the South African share market (net of inflation) since 1900. There is no pattern in these returns – they are random, which means they are impossible to predict.

Every so often you get a down year that will leave you wistful, or a full-on market crash, which will prompt morose thoughts about how you could have squandered that money in more hedonistic fashion.

The daily news flow affects the ebb and flow of investor sentiment. South Africa has always been a noisy place, but now we’re at a crescendo. The cornerstones were laid decades ago, but the building work is more frantic than ever.

There’s the plunder of our limited resources. There is the corporate complicity in our state’s capture. There’s the ruling party’s indulgence of our failing state-owned enterprises, the annual handwringing over SAA, Eskom and the rest, the refusal to put these assets into accountable – that is, private – hands. Add in the very public failures of Cape Town’s water management and Steinhoff’s accountants (to mention just two) and it becomes a daily battle royal for the front page. It’s not exactly a feel-good environment that encourages investing in the JSE.

That’s undeniably true if you need your money sooner rather than later. If nothing else, the one-year return graph confirms that the share market is no place for a short-term investment. But let’s extend that time horizon to, say, five years.

Figure 2 tracks the 5-year annualised return (net of inflation) for SA equities, bonds and cash since 1900. Two things stand out. First, the annualised real share market return over five years was almost never negative. It’s happened only once over the last 40 years. Second, you are hardly ever better off holding cash (or government bonds) rather than equities.

The one stand-out exception was around the turn of the millennium, when a series of bursting market bubbles, economic crises and currency collapses pushed our interest rates into the stratosphere. Other, briefer, periods overlap with WW1, the Great Depression and the high-inflation Seventies.

More remarkable are the periods when it didn’t happen despite the negative backdrop, such as WW2, the 1980s sanction era, or the Global Financial Crisis around 2008.

The point is, it can happen, but it rarely does. From a historical perspective, the probabilities massively favour equities. If you are investing for longer than five years, you can have a high degree of confidence you’ll do better with an index fund replicating the broad share market than with your savings account.

The longer you plan to invest, the higher your comfort level should be. Over 30 years, there hasn’t been a single instance when you would have smiled holding cash over equities (Figure 3). Rarely has it been close, even over the worst of times. In fact, the highest return from cash over any such period (3,7%) is still below the worst return from equities (4% pa).

Just as instructive is the difference in the long-term compound real return of these two asset classes: 7,3% pa for SA equities, 1% pa for cash. To put that into perspective, R1 growing at 7,3% pa turns into R8,30 after 30 years, R1 growing at 1% pa, just R1,35. One will help you fund a decent retirement if you save adequately; the other will lead you to the poor house even if you save twice as much.

Of course, future returns are uncertain and not guaranteed, but it would take a brave person to bet against a 120-year track record.

Yes, we are in a mire with respect to some of the issues listed above. But understand that these are the same feelings investors had in the Seventies, Eighties, Nineties and Noughties. Every time, we overcame our problems. And that’s the point: we are talking about temporary negative emotions stirred by the news cycle. As sickened as we all are about the events of the past few years, this comes from our sense of propriety, much more than from how these stories impacted us personally.

It unsettles us today, but tomorrow it’s in the trash, out of sight and, within a day or two, out of mind. Pick up a paper from a year ago, and you’ll realise that almost none of it mattered. And while you dithered, the stock market went up another 20%.

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