In recent weeks, the JSE has reminded investors that volatility is the name of the game when investing in equities over short periods of time. Investors who had invested new money over the last year (and expecting to see past returns replicated) would have been disappointed to see low, or even negative returns on their investment.
The bog-standard answer any educated advisor would give you when faced with a situation like this would be: “Remember, we have a long term investment philosophy.”
What does that even mean?
In short, it means that if you are invested for the long term (like we are), you significantly decrease your probability of permanent capital loss.
In the graph below we have taken data of the JSE going back to 30 June 1995, and looked at the possible returns over the various time horizons. We looked at the maximum return, the minimum return as well as the average return experienced.
As an illustration, take someone who has a Half-Year Investment Horizon and invests 100% into equities. Given the past experiences on the JSE, we would expect the investor to achieve an average return of 8.7% for the period.
HOWEVER: We would also expect this same investor to gain up to 57%, or lose up to 43.4%. That creates a massive spectrum of probable returns! If the possibility of losing 43.4% of your money within 6 months makes your palms sweat, you would be wise to listen to the advisor telling you to take a long term view.
On the flipside: If we now look at someone with a 15 Year Horizon, we see that on average we would expect this investor’s return to be around 16.4% per annum. A best case scenario would be gaining 20% per annum, and as a worst case scenario we would expect an annualised return of 14%.
Did you take note of that last part?
If you have a 15 year investment horizon, the bare minimum worst-case scenario return you would be expected to achieve in equities is 14% per year.
We hope the factual information presented here would enable you to ride out short term volatility like we have seen recently, and continue to share in our long term outlook on investing.
