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How to evaluate investment returns in tough economic times

Posted  February 11, 2019

Over the last three years, the local stock market struggled and investors battled to stay ahead of inflation. On average, the typical unit trust investors would use to save for retirement, delivered just north of 2% each year (till end November 2018). Some funds have done even worse. 

South African investors have been blessed with many decades where the stock market delivered unbelievable returns. The JSE’s recent disappointing performance should be considered against this background. It is akin to suddenly be driving 60 km/h after racing at 140 km/h. While analysts have for some time warned that investors should expect lower returns, the slowdown is uncomfortably noticeable.

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How to evaluate the returns on your investment statementWhile low returns are a reality, how low is acceptable and how should you judge the returns on your investment statement? Consider the following:

Evaluate returns over a longer period
Even the best fund managers will experience periods of underperformance – performance does not materialise in a straight line. Where a fund has a sizeable exposure to stocks, it is important not to evaluate the performance over one to three years. If a fund only invests in stocks, it may be appropriate to evaluate performance over a period of seven years or more. For retirement funds where more than half the fund is invested in the stock market, five to seven years is probably an appropriate timeframe for the evaluation of performance.

You need to keep ahead of inflation
At the very least, over the long term, you need to grow your money ahead of inflation (currently around 5.2%).

Consider your investment objective
Since you probably chose a fund or investments with a certain objective in mind, you should evaluate performance in line with your objective over an appropriate time frame. If your objective is to save for retirement, and you have invested in a tax efficient vehicle where the underlying objective of the fund is to beat inflation by 5%, you would expect the fund to deliver an average return of 10% per annum over periods of five to seven years (if the assumption is that inflation is 5%). If your objective is to go overseas in a year’s time, you would probably choose a money market fund where the risk that you could lose money is low, but you would still want the return to be more than inflation.

Adjust your expectations
Against the background of lower returns and increasing longevity, investors need to accept that they will have to save more, work longer and adjust their expectations (and plans) along the way. The future is inherently uncertain.

How to navigate tough timesEnsure your investment strategy is appropriate
The challenge is to diversify and to structure a portfolio with the appropriate exposure to various asset classes – including offshore investments – in line with investment goals, time frames and rand expenses and not to run offshore or into cash as a knee-jerk reaction to short-term stock market movements.

Stick to your plan
There is a real risk that investors may become impatient with stock market returns and switch to cash or seemingly higher yielding investments. For long-term investors who structured their portfolios according to a well-crafted plan and in line with their investment goals, this is a dangerous strategy as there is a risk that they will sell stocks while they are “on sale”, only to buy again when they are expensive. Or worse, investors might be tempted to buy into the next investment fad that “guarantees” high returns, but where they end up losing their hard-earned capital.

Portfolio changes should be informed by changes to personal circumstances and not by short-term market movements. Yet, investors should discuss the allocation to stocks, bonds, cash and other asset classes in their portfolios with their financial adviser as there may be a need to adjust the portfolio from time to time.


The information contained in this document does not constitute as advice. Should you need advice, please contact one of our friendly and capable 1Life high advice consultants.

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