What if low returns are the new normal? Survival and growth strategies for your investments.
The performance of the Johannesburg stock exchange over the last 5 years has got every investor and Financial Advisor/Planner concerned. Many of us remember the times in the not to distance past where the JSE was giving us returns in high teens or twenties – no more.
When you’re putting a financial plan together, with or without some help, making assumptions are unavoidable. We Planners, have to make assumptions for the future on inflation, returns, tax, regulations, fees etc and our clients have to make assumptions like how much money they will need at retirement, if they will still have any debt or liabilities and at what age they are going to retire.
We also have to make assumptions on the returns that can be expected from each of the major asset classes (Equity, property, Cash and Bonds). Those assumptions for the medium and long term have worked for decades, but perhaps the model is broken – even if it is just broken for RSA Inc and not globally.
We usually measure the performance of an investment as CPI (Inflation) plus a certain percentage. This measure works well because the absolute minimum we should expect from an investment is that it keeps up with the “purchasing power” of the sum invested. When inflation is zero (as it has been in various parts of the West in the last decade) any return we get is a ‘reward’ for lending that money to someone else to use, in the case where there is inflation, the ‘reward’ is what we get over and above inflation. The RSA inflation rate in March 2019 was 4.4% (this is quite low by historical RSA standards and within the SARB target of 2-6%).
In the past we’ve always assumed that Cash will return about CPI or CPI minus 1%. In money market accounts (cash) you can expect anything between 5% and 7.4% and has been for years, in other words as high as CPI plus 3%. This is almost unprecedented. Bonds, both government and Corporate have been doing even better than this, and while we may equate it as being ‘like cash’ it actually is more of reflection of the amount of risk investors see in the country/company. These bonds have propped up many investments in the last couple of years (there has to be some upside to being considered a ‘high risk’ country to invest in, right?) Equity is usually assumed to return CPI plus 5% or more. In the last five years the JSE has returned 19.5% in total over the five years, or less than 4% per annum. THAT is what has everyone worried.