Hindsight makes diversification look unnecessary.

This is such an insightful quote by Joe Wiggins (read the full article here) .

When you look back on past returns it is easy to convince yourself that it was obvious what you should have been doing.

That you could have captured the best performance available. This will probably make you feel frustrated. 

But getting frustrated is a disservice to yourself and your emotional well-being. 

Here I offer some examples, using the broad asset classes (things you can invest in) for South Africa.

Each graphic shows you what investing R100 in each asset class would have delivered for that specific time period. (For simplicity sake it ignores fees, taxes and assumes no additional cashflows).

Looking back 18-years

Over a long time period (18 years above), you can see that SA equity (share or stock market) turned R100 into R835. That is an average annual return of 12.5%. 

In Hindsight you just load up on as much SA equity as you can and sit back and enjoy. 

SA Property was an even better performer, right up until the end of 2017 when things took a sharp turn for the worse. But over the full 18 year period you were still much better off in Property than in SA Bonds or Cash.

Note how boring and safe SA Cash is – the line is just a very gradual but steady grind higher, turning your R100 into R339.

Inflation (CPI – consumer price inflation) in SA averaged about 5.5% over this period so for your R100 to still buy you what it used to buy you, it would need to be worth R262. In simple terms anything above that has improved your purchasing power or real wealth. 

Looking back 10-years

Shrinking our time horizon to the last 10 years and you can see that owning property may have started out nicely, but then collapsed in the pandemic, to deliver heavy losses. And over the 10 year period you would have pretty been static (R100 becomes R119).

SA Equity is still the best performer overall but it too returned less than cash (in 2020) as a result of losses during the pandemic shutdown.

SA Bonds and Cash tick along in a more predictable way, minus the opportunity for either very good or very poor returns. 

Looking back 5-years

Shrinking our time horizon further, to the last 5 years, and Hindsight will tell you it was obvious not to have had anything invested in SA Property at all. 

But now maybe Hindsight is feeling a little schizophrenic – Was it a good idea to be owning SA Equity or not? In fact as at the end of October 2023 SA equity has delivered marginally less than SA bonds over the 5 years.

What if you had started this period 5 years from retirement? How would you be feeling now?

If you owned SA Equity, how would you have felt underperforming SA Cash and Bonds for the first two years? Would you have held onto the position?

How about SA Property which turned your R100 into R79 by the time you reached retirement – surely that would have been a sell?

Looking back 3-years

Finally, over the last 3-years order is restored to the universe. SA Equity and Property are the clear winners. You have been rewarded for taking on the extra risk.

And of course Hindsight would have helped us to capture the rebound in property stocks with perfect timing. 

Looking back 12-months

And what about over the last 12 months?

SA cash has been the investment of choice in Hindsight.

If two investments start with R100 and end with R108, the one that has done this with the least gyration (volatility) is the preferable investment.

Both technically and emotionally.

What you can take away from this

– Without the benefit of hindsight it is impossible to know what returns the market will deliver with certainty. 
– You can however make some inferences based on current yields for cash and bonds, or valuations for Equity and Property investments.
– Over very long time horizons it is a good idea to own some Equity and Property.
– For very short time horizons, you should probably own neither Property nor Equity.
– Having an appropriately diversified portfolio for your time horizon is the right thing to do. But it will always feel a little like you are missing out.