Welcome to Taking Stock Spring 2024

Perception versus reality: lessons from life and investing

Despite the strong market recovery, many investors have sought refuge in the perceived safety of cash. How should investors think about risk?

18 Nov 2024

5 minutes

Siobhan Simpson

This year has been transformative for me, as I welcomed my daughter into the world. Parenthood, like many life experiences, comes with a blend of expectations and reality checks. While I always wanted to have a child, nothing quite prepared me for the short-term challenges – like those sleepless nights or teething troubles. But in the long term, those temporary difficulties fade into the background. I’m sure that 20 years from now, I won’t be reminiscing about that exhaustion; instead, I’ll cherish the milestones and memories we’ve created together.

This experience highlighted an important parallel between parenthood and investing: the gap between perception and reality, and the importance of having a long-term mindset. We often have preconceived notions of how things will unfold, yet the reality can be quite different. In parenting, the short-term challenges of sleep deprivation don't diminish the long-term rewards. Similarly, in investing, short-term market fluctuations shouldn't derail a well-thought-out long-term strategy.

Instinctively, it feels as if the rate of change has sped up and market volatility has increased since Covid, and that dramatic events are unfolding in ever-quicker succession – from Russia’s invasion of Ukraine to the escalating conflict in the Middle East to a seemingly never-ending cycle of elections across the globe. But again, this perception belies the reality. The VIX (a measure of market volatility) has remained relatively stable when viewed relative to the long term. This should remind us not to lose sight of the bigger picture amidst day-to-day uncertainty and a seemingly never-ending barrage of negative news headlines.

Despite the strong market recovery, many have sought refuge in the perceived safety of cash.

Unfortunately, countless investors have done just that. Despite the strong market recovery, many have sought refuge in the perceived safety of cash. This trend is reflected in the unit trust industry flows. Over the year ending June 2024, the industry recorded its worst flow numbers ever, with nearly R37 billion in outflows (excluding money market funds). The flipside of this is that household bank deposits have soared to a record R1.85 trillion, according to the South African Reserve Bank’s Quarterly Bulletin, and money market fund assets are at all-time highs.

Since Covid, the only sector to capture meaningful inflows was income funds, which attracted R133 billion, while multi-asset funds saw outflows to the tune of R74 billion. Despite the outflows, both the multi-asset and equity sectors grew their assets under management, reflecting the strong market rebound. By contrast, two-thirds of the growth in income fund assets was due to the inflows, not market performance.

Despite the perception that investors were not being rewarded for risk, the reality paints a different picture. Over the year to 30 September 2024, SA equities returned 23.9%, bonds delivered 26% and listed property a remarkable 51%. Those sitting in cash earned a modest 8.6% return. Even over the longer term, where in some years there was a convergence of asset-class returns, investors would still have been better off had they had a balance of exposures.

Financial advisors play a crucial role in helping clients understand their true investment horizon and how to think about risk.

Financial advisors play a crucial role in helping clients understand their true investment horizon and how to think about risk. Just as the challenges of early parenthood fade in importance over time, so too should the short-term volatility in investment portfolios when viewed against long-term goals. Be sure to read Paul Hutchinson’s article in which he explores why patience is possibly the most important virtue when investing for long-term growth.

In the same vein, both parenting and investing require a long-term commitment and discipline, and the sooner you start instilling the discipline, the better the long-term outcome. Consider these three scenarios over a 20-year period:

1 Invest R1 000 every month for 10 years in a high equity multi-asset fund, then stop contributing and hold the investment for a further 10 years.

2 Wait 5 years, then invest R1 000 a month for a 10-year period in the same fund, then stop investing for the last 5 years.

3 Wait 10 years, then invest R1 000 every month in the same fund for the next 10 years.

While the total contribution in all three scenarios is the same, the results vary dramatically. Figure 1 tracks the performance of the average high equity multi-asset fund. It powerfully illustrates that if you had invested for the first 10 years only and then stopped contributing, your money would be worth almost 2.4 times more than had you waited 10 years to get started, and roughly 60% more than it would have been had you chosen scenario 2.

Figure 1: Start investing early to reap the rewards

Your chart will be shown here

 

Past performance is not a reliable indicator of future results; losses may be made.

Source: Ninety One and Morningstar, dates to 30.09.24. Performance figures are calculated NAV to NAV, net of fees, with income reinvested (ZAR). For illustrative purposes only. The performance numbers shown for each scenario represents the cumulative lump sum performance over the full investment term.

From early investment discipline to enjoying the fruits of it later in life, Jaco van Tonder shares key findings from his updated research on living annuities. He considers, amongst others, the appropriate offshore allocation, guaranteed annuities and the inflation rate, manager alpha and its outsized impact on living annuities. Be sure not to miss it.

In conclusion, remember that investing – like parenthood – requires a long-term commitment. By maintaining this perspective, advisors will help clients navigate the gap between perception and reality, ultimately leading to better long-term investment outcomes.

Thank you for your continued support.

Siobhan Simpson

Siobhan Simpson
Head of SA Unit Trusts

Authored by

Siobhan Simpson
Head of SA Unit Trusts

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