• Adriaan Pask, CIO at PSG Wealth

Investors still benefited over the past 15 years

Over the past 15 years, South Africa (and the global economy) has faced several headwinds. The most significant two being the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic and global recession. South African investors also had to contend with a strong dollar placing enormous strain on emerging market (EM) currencies, investments and markets. Not to mention all the challenges the South African economy had to navigate, which led to weak business and consumer confidence.

Yet, despite this, equity markets returned just over 12% (as represented by the ALSI, shown in the graph below). This is in line with our forecast for the period: returning inflation plus 6.70% for the asset class. This explains why long-term investing is essential, but also that the assumption remains realistic. So, despite the recent extreme volatility due to the COVID-19 pandemic, investors who have remained invested continue to reap returns from equities as we initially planned.

15-year annualised total real returns

Source: Morningstar Direct

It’s important to remember that no investment will ever be without adverse macroeconomic or market events. However, they hardly matter at the end of a long-term investment horizon. Research has found that that although past market corrections have been painful, the subsequent expansions have been powerful. According to the Capital Group, recessions in the USA have on average lasted 11 months since the 1950s, while the average expansion has lasted about 67 months. In fact, these pullbacks have proven to be golden opportunities for investors.

So, if tough economic conditions and multiple recessions and market shocks are not the real enemies of creating long term wealth, who are the real enemies?

By far, the deadliest silent killers to wealth creation are the existing retirement income shortfall crisis, inflation and acting on emotion.

How to beat these threats?

Firstly, ensure that your asset allocation mix can deliver inflation-beating returns. With cash rates on a sharp decline this year, it once again highlights the importance of exposing a portfolio to some growth assets. Without this kind of exposure, you risk generating negative real returns.

Secondly, save as much as you can, as often as you can. An asset allocation mix cannot do all the work. Although market growth is essential, being disciplined enough to make regular contributions to your investment plan is what sets successful investors apart.

Lastly, if you have a plan, and it is set to meet your long-term goals, exercise some patience and leave the plan to do its work. Remember, a plan is only as good as its execution. Don’t let market turbulence allow you to be overwhelmed by fear. The best solution to combat these threats to wealth creation and enjoy the rewards of financial freedom is to have a trusted investment partner by your side.