Publications
Partners
This podcastis brought to you by Satrix, a leading provider of passive investment products in South Africa.
There are certain investing principles which hold throughout time. Understanding these will help you manage your expectations around the returns you can expect from your investment as well as how much you’ll need for the goals you’re setting.
Tim Modise is with Candice Paine of Satrix. This time around we’re going to take a look at the long-term real returns. We spoke about asset classes. We spoke about returns, risks and the different products that are available. Let’s now check how in the real world the story works. Candice, welcome.
Thanks Tim. One of the issues that we face dealing with investors who don’t really understand the stock market is managing their expectations about what they can reasonably expect from their investment over time. For all the good news stories you hear about people getting rich from the stock market there are equally ones where people have money. There really is a simple way of understanding what you can get from the stock market.
First of all, your first hurdle with investing is to outperform inflation, so when I talk about real returns I’m talking about the return that you get over and above inflation because once you’ve achieved inflation, which in the South African context is five to six percent – you are still just standing still. If you want to grow your capital, you actually need a real return, over and above inflation.
What we did was we looked at 100 years of data to try, and get a sense of what each of the asset classes can give an investor, given that they do the time, in the requisite asset class, so we looked at 100 years of data and we took rolling ten years of that, and looked at the average. What that’s come up with is if you look at share investing, in the South African context, the real return is seven percent, so if you add on five or six percent to that – what you can reasonably expect from an equity investment, over a long period of time, is 12 to 13 percent.
Now, bear in mind that that return doesn’t come in a straight line. Some years you get minus ten percent from the stock market. Some years you get a positive 20 percent, but over time, which is seven to ten years in equity investing you should get on average 13 percent from your investment.
If we extrapolate that thinking to the other asset classes that are available for individuals to invest in. Let’s start off with cash, which is cash in the bank. Over historical periods, we’ve been able to give you two percent real return, (two percent above inflation) but currently we have extraordinarily low interests rates. Not only in South Africa but also globally and this is a result of the 2008 financial crisis, where governments have lowered interest rates to maintain economic growth within countries.
Currently, you are getting what is called a negative real return from your cash, where inflation is actually higher than the interest rate that you get from cash. So sitting with your money in a bank account is probably not the best idea right now, but understanding the risk that you take on, if you move into another asset class is hugely important.
If we compare it with what you can get from licit property investments, so property is a combination of a share listed on the Stock Exchange and a bond, because it’s giving you that rental income, and property gives you in the order of about six percent ‘real’ – six percent, over and above inflation.
Very interesting indeed. Then of course, the key issue there is inflation and interests, well the growth that you earn, but subtracting the inflation (as you explained).
Absolutely, and time. Everything takes time.
Thanks very much Candice, for reminding us time should be your friend here.
* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.
