
INVESTMENT INTELLIGENCE
7 LONG-TERM INVESTMENT LESSONS – A SOLID FOUNDATION FOR YOUR FINANCIAL PLAN
By Jurie de Kock | Financial Planner | PWM Cape Town
With lots of known unknowns, caused by excessive market volatility and the unequal responses by governments the world over, the Covid-19 pandemic has left even the most seasoned investor feeling uncertain about the future.
Often, to make sense of the noise, investors ought to take a step back and regain perspective. Analysing long-term data is crucial to our investment process and it also teaches us some profound lessons and principles. Understanding these lessons will help you build the right investment solution to achieve your goals.
While these are well-known principles, in times of crisis, we tend to forget them. However, it is during these tough times that we need these lessons the most.
We have seen this time and again, that during a crisis, investors essentially go into survival mode. They lose sight of what we are trying to achieve, and their focus starts to narrow. They are more interested in how the crisis plays out in the short term, when we should be doing the complete opposite.
Here are seven simple, yet fundamental lessons that will help you as an investor to build a more resilient portfolio, even amid widespread uncertainty. They will help you look beyond the short-term volatility and discover the truth about investing, charting a path forward.
1. INFLATION IS YOUR ENEMY
Most investors underestimate the erosive impact of inflation on their spending power. Inflation is still the biggest enemy of savers, as they do not notice how destructive inflation can be over time. It is therefore important to generate real returns over time, i.e. inflation-beating returns.

2. TIME IS YOUR FRIEND
The main reason investors prefer cash to equities is the fear of losing money. The best way to manage the risk of losing money is to remain invested in equities for longer. It is all about time in the market, not timing the market. The best way to decrease the probability of losing money is to invest over the long term. As soon as you extend your holding period for more than three years, SA equity’s past performance shows that the chance of losing money becomes negligible. Take what happened in 2008: after a negative 30% real return, the market rebounded to deliver 14% a year over the following five years!

3. YOU NEED EQUITIES, AND CASH IS TRASH
Many investors will not retire with enough money. Equities have the potential to provide higher growth than other asset classes. This is important, as you will need your money to beat inflation and last longer – especially considering that people are living longer than before, and their money will need to last well into retirement.
While cash in the bank is considered low risk, it does not increase your real (inflation-beating) wealth over time. Over the last 100 years, cash has had an after-inflation return of less than 1% a year. Using each asset class’s long-term average real returns, this is how long it will take to double your investment value:

4. COMPOUNDING IS A POWERFUL WEALTH GENERATOR
Staying invested over time offers the benefit of compound growth, which means that you make money on your original investment as well as on the gains made in previous years. Money needs time to benefit from the full potential of compounding. Start saving as soon as you can, leave it for as long as you can, and let compounding do the work for you. Choose to reinvest your dividends when appropriate to maximise your growth.
Using the long-term nominal average return of 13.6% a year, look at what happens when your money is invested in SA equities over time:

5. CONSIDER THE HIGH PRICE OF MISSING OUT
Short-term volatility often leads to investors selling their investments at the worst time – it costs you more if you exit the market prematurely. Research has shown that the 10 best days on the JSE occurred after periods of the worst performance. Missing out can drastically affect your investment plan.
Sitting on the sidelines and missing those good days can be detrimental to your savings. The only thing you can control is having a well-considered plan and ensuring that you stick to it. It is the best way of improving the likelihood of achieving your intended portfolio performance.
The performance of R100 invested in the FTSE/JSE All Share Index (January 1999 to December 2020) is illustrated below.

6. DIVERSIFICATION IS THE ONE FREE LUNCH IN INVESTMENTS, SO USE IT
Although you need growth assets like equities to grow your investment, equities have not always been the top-performing asset class each year. The best way to reduce volatility is to diversify across different asset classes.
Equities may have been the best performing asset class since 1930, but cash was the best performer for 11 of those 91 years and listed property for nine years.
After time in the market, diversification is the second most valuable tool you can employ to manage risk, as it reduces the impact that a single, poorly performing asset has on your overall portfolio. To this end, it is vitally important to ensure that your portfolio is optimally diversified across asset classes to reduce the chance of large drawdowns and, ultimately, enhance the portfolio’s resilience to overall volatility.

7. ACTIVE ALLOCATION ADDS VALUE
It is important to remember that asset classes have distinct secular or long-term periods of under- and out performance. An expanding investment universe creates an opportunity for active managers to add value by managing portfolios across asset classes, which can be a vital tool in delivering superior returns on a risk-adjusted basis.
