As the tax year comes to an end, investors assess their retirement annuities and tax-free savings accounts. They also ask: Why is there a variance in my monthly contribution returns? The short answer is that debit order investments benefit from down markets.
During the last few years, it seems as though we have started each year in the same way: Warning investors about potential market volatility. This year, as local and global factors converge into a cooking pot of uncertainty, seems to be no different. In the end, however, our advice has been stellar and has rewarded investors who stayed the course.
It has been a tough year for South Africans. In fact, we have been having tough years for as long as we can remember. Inflation has slowly been increasing since the 4% levels that we saw pre-COVID. In 2022, inflation reached nearly 7% and will most likely be around 6% in 2023. Higher inflation means that buying power deteriorates faster, making South Africans feel poorer. Interest rates, which are also higher than they should be, are doing their share to make us feel miserable.
To curb inflation, the South African Reserve Bank (SARB) raised interest rates by 4.75% to a 14-year high of 8.25%. Following the various shocks that our economy faced throughout COVID-19, inflation breached the upper limit of the SARB’s target range for 13 consecutive months, which led to the SARB tightening monetary policy since November 2021.
Most investors understand that diversification is important. Research has shown that investors can produce better risk-adjusted returns by diversifying between, and often even within, different asset classes. Someone who uses traditional financial instruments to save for retirement will typically invest in a balanced portfolio. Depending on many factors, they will have around 40% to 60% equity exposure (local and global), 15% to 30% fixed-income exposure (mostly local but also global), and then some listed property, commodity, and cash exposure.
Nobel Prize winner Harry Markowitz famously said that diversification is the only free lunch in investing. In simple terms, this means that you can quite easily keep your expected level of return constant, or even increase your expected return, without taking on additional risk. Diversification is one of the most important principles in investing: It involves spreading your money across a variety of assets or even across asset classes.
American stockbroker, Peter Schiff, delivered a timeless reminder: “The stock market is not the economy, and the economy is not the stock market”. What Schiff was trying to say is that the stock market, often referred to as Wall Street, is not always an accurate reflection of what occurs on Main Street, that is, the real economy. Schiff’s statement has never rung truer than in the ever-fluctuating landscape of today’s financial world.
Shortly after the turn of the century, following the Asian financial crisis in 1997-1998 and the dot-com bubble burst in 2000-2002, investor sentiment swung increasingly in favour of emerging markets. China was the main driving force, growing at an average rate of about 10% annually between 1990 and 2000, and almost reaching an 11% annual growth rate between 2001 and 2007-2008.
Like most passionate South Africans, we thoroughly enjoy watching the Rugby World Cup. Setting aside the tragic events that have unfolded in Ukraine and Israel, this sporting event often resembles strategic warfare between nations. Just as governments play crucial roles in ensuring success within their respective domains, referees are vital to maintaining order on the rugby field.
Over the last 15 years amidst market volatility, the average local balanced fund has achieved the commonly used CPI+5% benchmark only 42% of the time over a three-year investment horizon. Consequently, investors have increasingly turned their attention to alternative investments and return sources, especially in the wake of recent bond market volatility and the uncertain outlook for equities.
