Don’t panic

EACH YEAR JANNIE MOUTON – CE and founder of investment group PSG – addresses investors at the company’s annual general meeting and does a quick calculation that highlights the power of a compounded investment in PSG. Last year that statistic read: “R100 invested in PSG in 1995 – and with dividends reinvested – would now be worth around R34 000.” That’s a fantastic return in anyone’s language.

Sure, PSG was helped by some fantastic investments, including its hugely successful holding in Capitec Bank. But what the example does show is the value of buying into investments over an extended period of time with high levels of return on equity for shareholders.

More importantly, when you look at PSG’s investment return graph, you see much of its performance only comes in around 2003/2004, when Capitec was unbundled. It took eight years to unlock the value. But now it has been unlocked, investors enjoyed compound growth of 60% between November 1995 and February 2008.

Paul Cluer, MD of Foord Unit Trusts, has conducted some research on its own funds to highlight the value of compounding investments. “If someone had invested R20 000 in the Foord Umbrella Provident Fund 23 years ago that investment would today be worth more than R6m. Over that time the fund’s unit price appreciated from a starting value of R1/unit to just over R300/unit in 2010. That’s a return of approximately 30 000%,” Cluer says.

Similarly, he uses the example of one of Foord’s employees called Carolyn Bywater, who 20 years ago invested contributions of R8 545 into the Foord Umbrella Provident Fund. That investment is now valued at R1 329 238 – without any additional contributions over the past 20 years.

Leading asset management firm Allan Gray calculates R10 000 invested on 15 June 1974 with it would now be worth in excess of R75m at 30 June.

While these statistics might serve as an inspiration for investors to at least consider taking a closer look at their portfolio, it’s often easier said than done to commit to investing for the long term.

Two instances identified by wealth managers where investors go wrong is they fail to stick it out over the long term and bail out just when their investment is beginning to compound, or they jump from asset class to asset class chasing short-term gains.

Last year – with the financial crisis sorely impacting South African households – many savers were forced to dip into their savings nest-eggs to maintain a certain quality of life. However, that reflects this short-term approach to savings.

Prem Govender, who heads the South Africa Savings Institute, kicked off National Savings Month by pointing out high levels of household debt were often used as a reason not to save. But she argued that with household debt standing at 80% of disposable income – and savings percentages for the same group of people coming in at -0,4% – that was an unsustainable situation.

Cluer advises investors: “They must be resolute in avoiding temptation to withdraw in a panic when markets are down. Trying to time market cycles can be very dangerous – even if you call the top of the market you have to then call the bottom of the market or potentially miss out on the recovery. Making one correct call is very difficult; making two in succession is almost impossible.”

 Perhaps the best piece of advice comes from leading investment guru Warren Buffett, who once remarked: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”