Any investor should have an idea of what they want to see from their money. It is no good putting your savings somewhere and simply hoping for the best. You must have a plan for them.
What is your investment goal?
Part of that plan is having an expected return. The goal with any good investment should be that at the end of it your money is worth more than when you started. That means that it needs to grow faster than the rate of inflation. This is something that unfortunately many investors overlook. Your wealth is actually only increasing if it is growing faster than your cost of living.
Inflation calculations
At the recent launch of its annual Long-Term Perspectives outlook, the Old Mutual MacroSolutions boutique illustrated just how inflation erodes your buying power. If inflation is at 6% a year, R10,000 today would be worth the equivalent of just R5,558 in 10 years. In 20 years, it would only be worth R3,118. That is why it is critical that you don’t just try to preserve your capital over the long term, but invest in growth assets such as equities and listed property to ensure that your wealth actually increases in real terms.
Returns above inflation
Since 1929 South African equities have delivered annualised real returns – that is returns above inflation – of 7,5%. Conversely, local cash investments have only produced real returns of 0,6%. Put another way, if you had invested in the stock market over this period you would have doubled your real investment value every nine years. To do the same in cash would have taken you 92 years. The trick, however, is that equities are not always the best investment from one year to the next, and cash isn’t always the worst. Sometimes their positions are entirely reversed.
Having a well-diversified portfolio in these times means that you will be spreading your risk while also getting returns from different places. That gives you peace of mind that you have some protection in place, and that you are likely to still outperform inflation over the long run.
