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Don't let sentiment interfere with your retirement planning - expert

Feb 27 2018 15:46

Cape Town - Although recent events in South Africa, like the election of Cyril Ramaphosa as president, may shape investor sentiment, they should not interfere with your retirement planning, says 10X Investments CEO Steven Nathan.

"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," says Nathan.

"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."

Nathan says contrary to many "informed" opinions out there, there really is no saying where the stock market will go next.

"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 ...It’s not exactly a feel-good environment that encourages investing in the JSE," said Nathan.

"...the share market is no place for a short-term investment."

He explains that, when looking at the 5-year annualised return (net of inflation) for SA equities, bonds and cash since 1900, two things stand out. Firstly, the annualised real share market return over five years was almost never negative. It’s happened only once over the last 40 years. Secondly, you are hardly ever better off holding cash (or government bonds) rather than equities, in his view.

"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 World War 1, the Great Depression and the high-inflation seventies," says Nathan.

"More remarkable are the periods when it didn’t happen despite the negative backdrop, such as World War 2, the 1980s sanction era, or the global financial crisis around 2008."   

For Nathan the point is that, from a historical perspective, the probabilities 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," says Nathan.
   
"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. 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% per annum)."

He also looks at the difference in the long-term compound real return of these two asset classes, namely 7.3% per annum for SA equities, compared to 1% per annum for cash.

"To put that into perspective, R1 growing at 7.3% per annum turns into R8.30 after 30 years; R1 growing at 1% per annum, turns into 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," says Nathan.

"Of course, future returns are uncertain and not guaranteed, but it would take a brave person to bet against a 120-year track record."     
 
He said investors likely experienced the same feelings 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," says Nathan.
 
"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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10x investments  |  investments  |  money
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