Investors underestimate for how long they will be invested. If you consider someone entering the workforce today, it is reasonable to assume that they have a 70-to 75-year investment time horizon, consisting of 40 plus years’ investing for retirement and 30 years’ living off their accumulated investments in retirement.
Yes, this is an extreme example but even someone mid-way through their working career realistically has a 40-to 50-year remaining investment time horizon. Unfortunately, underestimating your investment time horizon often results in you being too risk averse with what should be viewed as long term investments.
Time horizons are longer than you think
To better understand and illustrate investor holding periods, we analysed the average holding period of clients invested in various products on the Ninety One Investment Platform. The results are shown in the chart below. To determine the average holding period, we divided the average assets over the year in each product by any outflows from that product over the same year.
Figure 1: Average holding periods
Source: Ninety One calculations.
Consider then that the average holding period of an offshore investment is around 30 years, while even that of a local discretionary investment is at least eight years! The key take-out is that once an investor has decided to invest, they tend to stay invested. Unfortunately, however, the challenging market conditions of the past few years have resulted in investors being far more conservative in how they invest; an analysis of ASISA1 net flows into collective investment schemes show that most inflows have been into income funds at the expense of equity and multi-asset funds. The sad reality is that investors are not letting their money work hard enough for them.
With the above average holding period insight we can now, with a greater degree of confidence, recommend a more aggressive, growth-oriented investment solution. This is important, as it is mostly through investing in growth assets that you can confidently generate attractive real returns over the long term after tax and inflation; ‘risky’ assets on average earn a risk premium (higher return) over the longer term, but at higher risk (volatility) in the shorter term. By way of illustration, the long term real return (after taking inflation into account) for South African equities has been around 7% per annum over the last one hundred or so years. This is materially higher than the real return offered by more conservative asset classes (cash and bonds), which has only been around 1–2% per annum.
Time is on your side
As we know, a key concern for many investors is the downside risk associated with local and offshore equity and growth-focused multi-asset investments. However, with time comes a greater degree of certainty. The following chart illustrates that over shorter time periods, equity investors do run the risk of a negative return, but as the investment time horizon lengthens, so the risk of a negative return is ameliorated. What is also noteworthy is the fact that there has not been a rolling five-year negative return, a clear demonstration that time helps to lessen risk and improve investment outcomes.
Figure 2: With time comes certainty
Source: Morningstar, 20 years to 31 May 2023.
Acknowledging that you are likely to have a longer holding period than you realise, and that you need higher exposure to growth assets is important, especially if you are risk averse by nature. This is particularly true when considering that the key output of most financial planning exercises is the estimated investment return required to maintain your standard of living in retirement, and that in most instances you will need to be more aggressive in your investments than you may be comfortable with. However, the reward is very real.
You pay your money, and you take your chance
Consider the outcome for a long term investor who, unmoved by the above argument, invested into a cautious fund, as opposed to being correctly invested in an equity fund. The following chart illustrates the consequences, where a R1 million investment in the average multi-asset low equity fund (a proxy for a cautious investment) over a twenty year period would have returned R5.6 million at the end of March 2023, whereas the same R1 million invested in the average South African equity fund would have returned R15.6 million2!
Figure 3: The consequences of being correctly invested
Source: Morningstar, twenty years to 31 March 2023.
The value of independent investment advice
Given the very real consequences of this decision, we strongly recommend that investors seek professional financial planning and investment advice, tailored to their individual circumstances. Financial advisors will also be able to position the tax advantages of certain product structures that are available on the Ninety One Investment Platform. A more tax efficient investment product wrapper allows for the faster compounding of investment returns.
1 Association of Savings and Investment South Africa.
2 Source: Morningstar.
