investment strategy

So you think you know everything about investment returns?

Published: 29 October 2026
Written by Dominic White
No comments
Categories: Ideas About Money

Key takeaways:

South Africans investment returns are impacted by:

  • What they invest in – Asset allocation (cash/money-market, fixed-income/bonds, equities/shares, & property)
  • What the market does – Asset Allocation
  • What tax they pay on your investment returns – Asset LOCATION or the type of account you hold your investments in. (retirement funds, tax free savings accounts, endowments, taxable accounts).
  • What fees they pay to those that help you choose, administer and manage those investments – Advice, Admin & Investment Management.
  • Inflation or how much your cost of living increases each year. (Consumer Price Index or CPI)

Beware the false promise

I don’t believe misrepresenting returns is a good way to initiate a meaningful relationship – but apparently not everyone agrees with this. 

Investment returns are increasingly headlining in social media marketing campaigns by various advisors and wealth management practices.

You will have seen them. The hook is a nice big number in the lead graphic – If you have not earned at least *15% you need to talk to us, type of thing.

That nice little *asterix is your clue to two things….

Those returns are not guaranteed (and their compliance department should not allow them to insinuate such even if covered in the small print).

It is likely to be based on some really good recent returns which usually means they won’t be repeated. (2025 was an unusually great year for SA assets remember)

REMEMBER: Past performance shows you the returns you are not going to earn.

This makes understanding how returns really work, including what a reasonable return expectation is,  crucial to being able to make good decisions for yourself.

At the simplest level, investment returns are what you receive for letting someone else use your money.

What determines those returns and importantly how much of them you get to KEEP, is a little more complicated. 

Your headline or nominal return is usually what most people are focused on. (including sales and marketing peeps it seems).

It is linked to your investment strategy (what you invest in – Asset Allocation) and what you get to see in a factsheet for example. 

But the real compounding of your wealth, is one that protects the purchasing power of your money. This needs to account for costs, taxes and inflation.

These are the REAL RETURNS you get to keep.

1. What you invest in:

There are only two broad ways you can earn returns. Income and growth in capital.

A ) Growth Assets:

Euity and Property investments earn returns from a combination of income and capital growth (increase in value or price).The income, in the form of rental or dividends, also typically grows over time. But the returns are less certain over short time periods, and so these types of investments are better for long term wealth creation.

B)Income A

Cash and bonds produce returns predominantly in the form of interest income and these returns are therefore more predictable and certain. This certainty of returns, usually comes at the cost of delivering lower returns over the long-term. This makes income assets great for short-term goals; they can provide predictable cashflows and capital preservation.

How do you choose what to invest in?

Any goal or objective has a future amount of funds needed, an idea of what you can contribute towards the goal and some future date you want to achieve it by.

From these inputs you will be able to get an idea of the investment returns you require to get the job done.

In other words what you invest in is driven by your needs:

  • Your need for certainty (risk).
  • Your need for liquidity (access to your money).
  • Your need for income or cashflows.
  • Your need for returns above inflation (growth).
  • Your need for peace of mind and your ability to stick with a strategy (risk tolerance).
  • It makes sense to align your plan (and required returns) with an investment strategy that gives you those ‘required-returns’ with as much certainty as possible.

2.  What the market does:

Over long periods of time the typical risk-reward dynamics between growth and income assets does hold.  

But over shorter periods they can break down completely.

Most are surprised to hear that South African cash investments beat South African equities almost 44% of the time, if you are watching closely from one month to the next.

But as you extend your time horizon out to 5 year intervals, this falls to just 4% of the time.  

SA equities may have an average return close to 12.8% over the long term (20 years) but will hardly ever actually return 12.5% in any single year.

You will likely receive far more or far less than that average in any given year.

What can you reasonably expect to earn as returns?

It is perfectly reasonable to ask what kind of returns you could expect to earn.
There are many variables that can impact on the investment returns we can reasonably expect to receive over time, so we usually resort to getting a general sense by looking at the historic market returns.

Or alternatively, you can get  a fair indication from products that use a combination of these investments (called ‘multi-asset funds’ or ‘balanced funds’).

You can see where the sales or marketing messages get the *15% returns from, by looking at the 1-year numbers.  

And you can see why these are probably not reasonable returns to bake into your future plan by considering the 10-year stats.

This basic analysis provides a more realistic measure, as it looks at a longer economic and investment cycle.

A plan based on fictitious return expectations will not get the job done for you and if you are not paying attention, then you may find out too late.

If you do seek help, the promise of lofty headline returns is an easy test to conduct.

A genuine, knowledgeable and experienced partner will have the intention to work with you, in your best interest.

They won’t be trying to hook you in using lofty investment return promises.

3. What tax you pay

This is the part your real return which you will not see explicitly shown in any statement or report.These ‘returns’ come from saving tax.

Every Rand you save on tax, is a Rand that stays invested, and compounds year after year.

Money paid unnecessarily in tax is a permanent deduction. Once you pay it over to SARS there is no recovery mechanism.

The exact same investments in different types of of accounts will earn different returns.

Tax efficiency in your plan can therefore be just as important as investment choice.

Using retirement funds, interest income allowances, tax free savings and various other tax efficient options is a must.

4. What fees you pay

In a similar way as tax, your fees can reduce the returns you keep and compound. So fees are often touted as the enemy to be avoided at all costs.

There is an important difference though.

High fees alone do not mean worse outcomes and neither do low fees ensure a better outcome. Personally,  I don’t think fees are the problem. I am happy to pay fees when I receive something more valuable in return.

The problem comes in when you get no value or the value you get is less than the fee you are paying. 

The solution is to understand what you pay, to whom and for what added value.

You can then determine if you are receiving that value or not.

You get to eliminate those fees or change to a better value proposition.

You have the power and should use it.

PS: Zero fees are not a reasonable starting point as even DIY investors incur fees. You need a platform (admin fee) to manage your money and you need to invest (brokerage/investment management fee for funds or ETF’s)

5. Inflation

When developing a spending plan for your monthly expenses, or calculating how much you may need in retirement, you need to include some form of increase in your costs each year.

R1000 today and R1000 in 10 years’ time will buy you a completely different amount of groceries when you visit your local store. 

Another way to express this idea is to say that the ‘purchasing power’ of your R1000 has fallen. The same amount of money buys you less this year than it did last year.

The bare minimum return-hurdle therefore, is to make sure you keep up with the increases in your cost of living (inflation).
 
Since each of us consume a different mix of goods and services to make up our monthly expenses, we each technically have our own individual inflation rate.
 
But there is a broad measure of consumer inflation which is calculated and published by Stats SA that gives an indication of inflation  – This is Consumer Price Inflation or CPI for short.
 
You can manage your consumption to some extent, and so from a personal finance perspective, you can manage your inflation.

But a lot of our costs are not in our control, which means we don’t have a choice. Electricity, water, rates and medical fall into this category.

Why this matters to you

Generating the best returns for yourself goes beyond picking the best investments.

Good outcomes are better achieved by being pretty good at personal finances, financial planning and investments combined, rather than perfect in any one.

Everything is linked.

 A system that captures how each element impacts the other and creates the conditions in which you make better decisions at each level is incredibly powerful.

#orderpurposeprogress

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Your portfolio is down – What now?

Published: 24 March 2026
Written by Dominic White
No comments
Categories: Ideas About Money

Key Takeaways:

  • Slow down and don’t make rushed decisions.
  • Remind yourself of the time horizon that is important to you. 
  • Have you got a solid plan in place to start with. Revisit it.
  •  Don’t check your portfolio daily of you can help it. 
  • Talk to someone you trust about your concerns. 
There is no hiding from it, the current news flow is alarming.

It amplifies uncertainty which investors dislike and thus leads to market weakness as participants react and re-position.

In truth there has never been a period in history where you could not identify a risk which has the potential to cause a sudden sharp market sell-off. 

Uncertainty about the future always exists. It is just that we perceive it to be higher when it is flashed across our screens constantly or surprises us.

By definition events which upset markets must be a surprise otherwise they are already priced in. The Iran attack (or its extent) was a surprise and what we are seeing is concerning at various levels.

It is impossible to know what the potential downside is with any certainty. Too much depends on  the outcomes and how long it will take to end.

Energy prices are a very big determinant of economic well-being for governments, businesses and us as individuals. It is clear higher energy prices will already have a negative impact.

Too much here is not knowable. 

Checking your portfolio?
If you do happen to check your portfolio you will no doubt see it is off its recent highs.

Even with a well-diversified portfolio you may be back to where you were in December of last year.

I would encourage you not to be alarmed. Which I admit is about as useful as telling someone to calm down in the middle of a heated argument.

There is a strong argument to be made for not checking your investments regularly, especially at times of heightened uncertainty.

We all suffer from loss aversion and have a deep desire to act to avoid further losses. The urge is powerful and emotions can often trump logic.

But a market downturn is not the right time to be reassessing your tolerance for risk.

You will have less appetite for risk when markets are down 20% in real time, relative to how you felt considering the potential for a 20% paper-loss when markets were looking solid. You are human.

Here is a little experiment

Which one of the following investments would you pick?
You probably chose C right. I know I did.

Because all three assets finished at the same value, but C did not experience any downside.

It’s what we all want – All of the upside and none of the downside right.

But it is a trick-question.

All three assets are in fact the same Global Stock Index during the calendar year 2020. The good old pandemic year.

The difference?
A = checking your portfolio daily.
B = checking your portfolio monthly.
C = checking your portfolio once a year.

Good message but too neat?
I think it is a great message – worrying about short-term performance is likely to encourage bad behaviour.

But I also think it is unrealistic a lot of the time.

The 2020 market sell-off and then recovery was one of the fastest in history. So much so that it quite literally felt like it never happened. A few trillion dollars turns out to be an effective band-aid for a global shutdown. At least for asset prices.

The Global Financial crisis of 2007/2008 was very different. It took over two 2 years for the recovery to happen. That is a long time spent watching things deteriorate, even if you only look at your portfolio once a year.

If you were close to retirement,  or indeed already retired in 2007, seeing markets almost halve would have been traumatic.

Approaching an end goal requires more hands-on management leading up to the actual event – Simply not looking at your portfolio is unlikely to be very helpful.

There is risk in selling too
A truth you learn through experience is that selling out of risk assets is often the easy part.

After a period of strong market performance most people are enjoying great gains. Locking in some of that feels good.

And it could be sensible in so far as it fits with your strategy. In other words some kind of portfolio rebalancing.

But to sell risk assets (below your strategic allocation) to protect yourself from further downside near term, means you must decide when to buy back into markets too.

And this is far trickier than you may think.

When the market bottoms, no one waves a flag to give you the all clear signal. Putting money back to work in a down market feels like you are exposing your portfolio to even more losses. So many people wait.

The market bounces back by 10%. They agree that on the next pull-back they will buy. The market never has that pull back and the investor remains out the market and does not enjoy the returns that follow.
 

Focus on the goal
If you are a client and are receiving this then you have a solid, well considered plan.

That plan will have incorporated  your goals, which means we know your time horizon, your required returns and any cashflows into or out of your investment portfolios.

Your asset allocation will have already considered the potential for a sell-off, as these things happen to some extent more or less each year. And about every five years markets can experience what feels like catastrophic losses. What you are currently invested in will have considered your goals ability to withstand such scenarios.

If you have big cashflows INTO your portfolio we will have considered this too. Inflows we can largely ignore into weakness because buying into a weaker market is beneficial to you.  

It is the cash OUTFLOWS which are more of a concern because if you have not made provision for them in your plan then you risk needing to sell assets which have fallen in value to meet these cashflows.

If you and I are investing together I will have factored these cashflows into your plan for you. You will not be in a position where you are forced to sell assets and lock in losses.

Talk it over
Headlines and market commentators will frequently use fear as a marketing tactic at times like this. They intend to cause you doubt and possibly even scare you into action.

Do not be hasty. You would do well to take some time to seriously consider any potential action. 

If you are not sleeping well at night, then you may want to revisit the goals you have set and the investment strategy you have in place.

If all is in order, I hope that will help put things into perspective and provide some peace of mind.

I am here if you would like to discuss anything about your plan or portfolio that we have worked together on.

If we have not worked together as yet and you are feeling a little anxious, lets have a conversation and see where you are at if you like?
 
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New SA inflation target and your money

Published: 27 February 2026
Written by Dominic White
No comments
Categories: Ideas About Money

Inflation impacts almost every financial decision you make.
 It would have been easy to miss or dismiss the South African Reserve Bank (SARB) and Treasury officially declaring their intention to target a lower inflation rate late last year. 

In my opinion this was the biggest news event from 2025 in terms of potentially having the largest ongoing impact on your finances.  
 

Why it would make sense:
1. A lower inflation rate would likely lead to lower bond yields longer term. Bond yields represent the interest rate that the SA government pays on its outstanding debt. A lower borrowing cost, would mean the government spends less of it’s annual budget on servicing its debt. 

2. A lower inflation rate should feed through to lower expectations for the governments very high public wage bill and could therefore also help cut spending. 

3. Lower inflation would lead to lower interest rates over time. Lower interest rates would mean cheaper money for investment and growth and lead to better economic conditions, higher corporate profits, possibly lower unemployment, which if extrapolated far out enough, could lower crime rates etc etc

A Virtuous Circle that makes SA more attractive and investible and should impact positively on all citizens lives.  

Why it won’t be easy to achieve:

Many costs that make up your monthly expenditure are not driven by market forces.

1. Some prices are administered (set by a regulator), like water and electricity.

2. Some prices are raised above CPI rates, like education, healthcare and medical aid premiums. You tend to have less power to reduce spending in these departments and often have to accept whatever is charged. 

3. Other prices, fuel for example,  are driven by external factors like the oil price, and the exchange rate. These factors are often sentiment driven and out of your control. Added to which, about 33% of the price you pay at the pumps is actually tax and levies. Fuel prices feed through into food and other goods via transport costs and so are far more impactful on inflation than merely the price paid at the pump. 

These factors mean CPI is not a good measure of your personal inflation rate. Monitoring your own spending plan will give you a much better idea of your personal inflation rate as your consumption basket is unique to you, your lifestyle and your life-stage. 

Inflation has important implications for the three main areas you need to be on top of in term of successfully managing your finances.

#orderpurposeprogress
#orderpurposeprogress

CREATE ORDER : Impact on your personal finances


Your personal income statement:

This is how you track what you have coming in versus what you have going out, identify disposable income for future contributions and understand what you need to protect from a risk planning perspective. 

If inflation settles at 3%, salaries and wages will likely grow more slowly in future.

Markets can and have already moved to price in expectations around this new inflation target. Bond yields are lower and further interest rate cuts are expected. You will have to factor in lower investment income from your savings. 

But your expenses probably don’t feel like they have adjusted downward as yet. That will take time if it happens at all. 

That mismatch can create short-term cash flow pressure which you will need to manage and potentially plan for going forward. 


Your personal balance sheet:

This is how you measure and monitor your net wealth, your progress towards specific goals, your tax planning and estate planning positions. 

A lower interest rate environment would be good for people with high levels of debt on their balance sheet but not great for savers or those that rely on their investment income to live off. 

The existing assets on your balance sheet, be it an investment portfolio, your retirement funds or your home, grow as a result of either receiving an income (dividends, interest, rental) or from prices going up.

A lower inflation rate could potentially lead to a lower nominal growth in your assets and therefore your personal  balance sheet over time.

Inflation expectations are baked into expected investment returns.

 

HAVE PURPOSE: Impact on your financial planning

The rate at which you adjust the cost of whatever you are planning for in the future (inflation) is one of the key assumptions in the financial planning process.

All your stated capital goals (education costs, holidays, holiday homes, vehicle purchases), your income requirements (pre-retirement planning ) and cashflow planning (post-retirement planning) use inflation to get a reasonable expectation of what will be needed to ensure a successful outcome. 

Most of the plans I put together currently use an annual inflation increase assumption of between 5% and 7%.

Adjusting only your inflation assumption to a lower level will reduce all future costs and essentially make your goals look far more achievable.

For example:
If something costs R1,000 today and you need to replace it it in 20 years:
At 3% inflation, the replacement cost would be R1,806
At 6% inflation, the replacement cost would be R3,207

If we keep all other assumptions the same, starting from zero today your required contributions would be:
At 3% inflation your required monthly contribution ≈ R2.10
At 6% inflation your required monthly contribution ≈ R3.75

It may be tempting to update your plan for a 3% inflation rate immediately but that would almost certainly make your planning process far less robust. 

The reason for this is that if we reduce our expectations for future inflation, we should reduce our expected returns from our portfolios too. 

In fact, in the financial planning process, the returns you use must account for more than just inflation. They account for costs and taxes too.

These are called your real returns and are far more important to your success than the nominal returns you would see when comparing asset class returns or even fund factsheets. 

 

MAKE PROGRESS: Impact on your investment strategy and management

In simple terms investing is about earning returns to meet some future use or objective. 

Rational investors allocate their money to investments they believe will deliver the returns required to get them to their goals with as much certainty as possible. They want to get a job done.

That job could be about creating wealth (increasing the purchasing power of your money) or maybe it is about wealth preservation (maintaining your purchasing power over time).

For the majority of investments, the returns generated are a function of what investors are willing to pay for the future cashflows those investments will deliver – Earnings for shares and interest income for bonds. (Gold and Crypto do not produce any cashflow and rely on prices continuing to go up to generate a return). 

Investment choice is also impacted by the risk investors are able and willing to accept to take in order to earn returns.  

If you are trying to grow your wealth or even just preserve it, it is logical that your investment strategy would not invest long-term in things that fail to produce real returns (protect your purchasing power). 

Income assets which deliver more certain returns will  track interest rates and inflation lower. Probably reducing the real returns you receive.

Growth assets could get a boost from a more stable inflation environment through various mechanisms like better economic growth, higher profit margins and  lower debt servicing costs all feeding down to the bottom line. The real returns you receive could therefore be more stable or even grow over time. 

Your investment strategy will need to balance income requirements and preservation against achieving the required growth to maintain your purchasing power.

There is a good chance that you will need to  incorporate more growth assets in order to meet your return requirements. These growth assets will in turn increase the potential  for losses over short time periods. 

For those consuming their wealth, this shift will increase the sequence risk (The order in which you earn your returns in the consumption phase of your journey) in your strategy. If you are forced to sell assets to cover your consumption needs when market prices are lower, you will lock in permanent losses. 

Sequence risk is usually mitigated by owning safer income assets to match at least a few years of required income. Lower returns from these income assets would make this more of a challenge. 

What I am contemplating:

 

  • Life Annuity rates offered by insurers are linked to long dated bond yields. They are already significantly lower as a result. A lower inflation rate could impact them further including the amount by which they contractually increase annually (escalating annuity). 
  • From a Living Annuity perspective, lower returns without lower consumption will increase the drawdown rate and stress the longevity capacity of the portfolio. 
  • If safer income assets are not delivering real returns but required returns stay high, this could put pressure on the need to take on more investment risk to achieve the required long-term returns. The need for a more dynamic and proactive approach to asset allocation is probably required for those in the consumption phase of their wealth journey.
  • South African’s have for a long time relied on the Rand to devalue against developed market currencies like the US Dollar, Sterling and the Euro, to enhance returns from offshore investments. While sentiment drives FX rates short term, it is the difference between the two countries inflation rates that drive the long-term relationship. If SA and US inflation are much closer in future, it would make sense not to expect the same level of devaluation of the Rand going forward. 
  • In a lower nominal return environment, the impact of fees will also become more noticeable. 2% on a 15% return is very different to 2% on an 8% return. Sharpen those pencils. 
  • Tax planning and making use of the tax mitigation options available to individuals will become even more important (see the Good News below). A high growth balanced fund incurs about 1%-1.25% per year in tax liability when invested outside of retirement fund or tax free savings account. With a focus on real returns this will be a tool that needs to be well utilized. 
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Never 100% offshore

Published: 30 January 2026
Written by Dominic White
No comments
Categories: Ideas About Money

2025 was a great example of why, as a South African, you should never have 100% of your investments offshore.

It was a sensational year for local assets, while the double digit appreciation of the Rand (ZAR) versus the US Dollar (USD) reduced returns from locally held offshore investments.

You may remember

If you were one of those South African’s reading Magnus Heystek’s sell everything, pay the tax and go 100% offshore a few years ago, this would be a good opportunity to recognise the value in a more balanced approach.

When you live in SA and the majority of your costs (liabilities) are in SA, you cannot afford to have all your money offshore for this exact reason. 

I would go one step further. Mentally store this information for the next time someone urges you to go 100% offshore. (there will be a next time)

Even just one year ago it was easier to believe the Rand would trade at 25 to the US Dollar than to think 15 was possible……  how things change.

The past returns of an asset are the returns
you are not going to enjoy.

A comparison between the 1 year returns and the average return over the last 10 years, can provide some insight.


The real question remains what comes next?


Asset Class Returns – 1 & 10 Years to end December 2025

Looking at average returns over longer time periods suggest that returns over the next few years will probably not match 2025.

This is not the same as saying 2026 will see a major sell-off. 

Fact is:

– Strong recent performance makes assets more expensive.
– Future returns are determined by the price you pay for the assets you own.
– Ergo periods of sustained strong performance are likely to be followed by more tepid returns.


You know what helps

Managing your expectations around returns and accepting that occasional sell-offs or downturns are what inevitably bring us closer to long-term average returns over time is important. 

Sell-off’s are a feature of investing, not a bug that can be fixed or avoided altogether. 

Matching your investment strategy to what you are trying to achieve, knowing you can’t predict future returns is why you build a diversified portfolio.

100% Offshore is never the right option if you are looking at your overall financial position.

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Investment risk stats in a factsheet: Decode them

Published: 2 December 2024
Written by Dominic White
No comments
Categories: Ideas About Money

How do you make sense of the investment risk data in a fund’s factsheet?

I’ll be honest, big-wave riding just looks like a bad idea to me. Mostly because it seems like there is a fairly good chance I could die doing it.

For me the risk is clear. It is significant. And it could impact very negatively on my future plans.

It makes not getting involved in big wave riding an easy decision for me.

From the picture I can tell that at least one guy in this world does not agree. 

But not all risks are as easy to identify, measure or avoid as this. 

Everything involves some risk. Driving a car, falling in love and statistically apparently using a  step ladder.

My wife has some pretty strong thoughts on how I approach all three of those risky things. Her thoughts probably evolve over time and depending on the circumstance.

Similarly, our attitude to risk in our financial lives also evolves depending on our circumstance, life stage and possibly what we have experienced in the more recent past too.

From an investment perspective we can get a pretty good idea ^ of the probability and magnitude of risk from a factsheet (or the more commonly used, yet less intuitive name – Minimum Disclosure Document or MDD).

^Caveat: This is only true if the time period we are assessing is long-enough to be meaningful. 25 years is pretty good. 5 years is pretty meaningless. 

Where to find the stats in the first place

You can find these documents, updated monthly, for any listed fund or ETF, on your favourite product providers websites. 

From the Allan Gray Balanced Fund* factsheet as of 31 October 2024, you can see how this return & risk data gets presented:

*chosen because it has one of the longer track records rather than it is one of my favourites.

In the words of one of my clients this week when I sent him a factsheet – ” I don’t speak Chinese.”

I can see where he is coming from – it is not very clear what it all means. I have been analyzing this kind of information for over 27 years now. So sometimes I can forget it is not as straight forward when you see this stuff for the first time.

Can I explain it in better terms for you so you can understand what the basic story is?

I don’t know but am definitely keen to try. You can give me feedback on whether I was successful or not if you like.

The Allan Gray Balanced Fund has an inception date of 1 October 1999. That means it was started 25 years ago and we have some useful data as a result.

Rather impressively,  the average annual return over this whole period is 14.8%. Every single one of us would and should be thrilled with a return profile like that. 

But we know returns like that do not happen in a nice straight line.

So what did holders actually experience and endure through this period?

The risk statistics provides us with some ideas. 

The following graphic puts this risk & return data into the context of how much Rand you would you have made or lost per R1000 you had invested at any point in time.

What do actually experience in terms the risk stats.


How to interpret this information?

Average Annual Return (green):
Over the entire 25 year period your average return per year would have been R148 per R1000 invested at the start. But if you have ever monitored the performance of your retirement funds you will know that this average return is hardly ever achieved in any one single year out of the 25. Returns are usually higher or lower than the average in any single period. 

Range (light blue & pink):
So we know not to expect the average. What can we expect then? Well the VOLATILITY data in the factsheet above tells us that 68% (or most) of the time, our R1000 earned about R90 more or R90 less than this average (R148). In other words  we can expect the returns per R1000 invested to range between about R240 on the upside and about R60 on the downside. 

Worst Year ever (orange):
So the range tells us that most of the time over the past 25 years we could be quite comfortable that we should not experience losses. But we cannot simply ignore that pesky 32% of the time where losses can and do occur. So how bad have these losses been? Over any 12 month period the most you would have lost is R141 per R1000 invested. 

Worst peak-trough loss (red):
In the factsheet this is called the MAXIMUM DRAWDOWN. It tells you what the worst loss is that you have experienced had you put your money in at a high and sold it at a low (regardless of what period of time) during the 25 years. This turns out to be R250 per R1000 invested. That can feel pretty scary when it happens of course. 

Best year ever (dark blue):
The best 12 month period you would have ever experienced saw you earn R460 per R1000 held in the fund. High fives, champagne corks popping, rock star investor badges handed out at rewards ceremonies and the like. Well hopefully not of course. Exceptional years are great but they usually make things more expensive and expensive things usually don’t enjoy the best time in the years immediately thereafter. 


Why should you care?

Balanced funds (or Multi-Asset Funds), like the one above are designed to comply with the rules governing what retirement funds can invest in (Reg 28). They hold a mixture of the  typical things you can invest in like shares, bonds, cash, property etc.

Most of us own something similar. 

They are broadly termed MEDIUM risk.

You can make some good returns overall. (ahead of inflation so protecting your purchasing power)

Most of the time you will enjoy positive gains in your portfolio value.

But every now and then you should expect to be nursing some losses. Sometimes these losses can feel very uncomfortable. 

But if you can get to grips with this information and manage your expectations around your investment returns, you are far less likely to do anything silly when the inevitable storms arrive. 

If you found this interesting you should also go and contrast the Money Market and Equity Fund factsheets from Allan Gray which will give you a idea of both a lower and  a higher risk return profile than the balanced fund used above.

 

 

 

Reach out if you have any questions on the above or if you would like help making progress in your financial life.

Email Dominic

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This article first appeared in White Investments monthly newsletter. Sign up at the bottom of this page or check out past editions here.

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Passive investing does not exist

Published: 6 August 2024
Written by Dominic White
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Categories: Ideas About Money

There is actually no such thing as passive investing as an individual.

Sure you can own a fund or ETF  that tracks an index, like the S&P 500, for example.

And it is true the fund is a passive fund.  

But when you choose to use that fund in your investment solution, you are making an active decision.

Why bring this up?

I was having a conversation with a prospective client the other day and they were somewhat fixated on AI and what has become known as the Magnificent 7 stocks in particular. 

If you are not sure what I am talking about here is a introduction to the Magnificent 7.

The following graphic illustrates why such a fixation is so common these days: 

The blue line in the graphic above illustrates how these 7 companies stock performance have turned $100 into about $400 since the start of 2020.

The black line shows you what the other 493 stocks in the S&P 500 (most common broad measure of US listed stocks) delivered excluding these 7 stocks. Close to what looks like about $130 over the 4.5 years.

And finally the grey line shows you how the rest of the global developed stock markets (Think UK, Europe, Japan, Asia and Australasia) have done excluding the US market. Close to what looks like about $100 – so no returns.

Basically if you have not owned the Magnificent 7 stocks you have strugged to make progress since just before the pandemic. 

Active decisions even with passive Funds:

If you were to seek exposure to this group of 7 companies you would have a variety of options to gain your US equity market exposure. 

You could own a fund that only holds only the Magnificent 7 stocks – many fund management companies build products to capture the latest craze.

But let’s say you are sensible enough not to put all of your money into just 7 companies, after all in 2022 you would at some point have had less than half of what you had originally invested. 

Then you could opt for the following:

– Nasdaq 100 Index: 100 companies skewed mostly to the US tech industry.
– S&P 500 Market Cap Index:  This gives you exposure to the largest 500 US listed companies.
– MSCI World Index: This gives exposure to the worlds developed markets equities. Roughly 2/3  is in US stocks. 
– S&P 500 Equal Weight Index: This index is designed to get rid of the heavy concentration risk. It weights each company in the S&P 500 equally – that is 0.2% in each company. 

Which index do you choose?

You could have chosen any one of these ways to gain access to the US equity market. However, the exposure you would get to these big 7 tech stocks under each option would differ quite significantly, as the following table shows: 

The table illustrates how even your inclusion of passive funds involves an active decision.

You can gain exposure to the first three of these indices right here in your South African investment accounts via various service providers including Satrix & Sygnia.

The performance in South African Rands (ZAR) for each of these options is shown in the graphic below.

Clearly the more you had in the Magnificent 7, the higher your returns over the last five years would have been. 

I have shared the idea in a previous article that:

‘HINDSIGHT MAKES DIVERSIFICATION LOOK UNECCESSARY.’

Essentially looking back at past performance can make a decision seem like a no-brainer. 

Making decisions looking forward is infinitely harder because the future is unknowable. 

Another concept I have shared which is worth bearing in mind is that:

‘THE PAST PERFORMANCE OF AN ASSET REPRESENTS THE RETURNS YOU WILL NOT BE RECEIVING.’

What are the chances that this type of outperformance persists from these levels going forward?

Who knows?

My approach is:

– To focus more on price paid for an asset, as I believe the price you pay for an asset is the best predictor of likely future returns.

– To not get caught up chasing the hype. It usually does not end well. The cure for high prices is high prices after all. 

– Link the investment strategy to the end goal or purpose. This will imply a future amount you need. A time horizon for when you need it. And an idea of what you can contribute to the goal. Those inputs will infer a required rate of return from your investments. 

– To construct a well diversified portfolio which will have a good chance of delivering the required-return target, rather than try and pick the best performers year-in, year-out. It will aim to achieve this return in the most certain way possible – minimize the potential for negative outcomes.

It is hard to stick with these principles in the face of such rampant performance from such a small group of stocks over shorter time periods that’s for sure. 

Reach out if you have any questions on the above or need help making progress in your financial life.

Email me

Follow my Facebook Page for insights, motivation and sometimes a bit of fun.

This article first appeared in my monthly newsletter. Sign up at the bottom of this page or check out past editions here.

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Financial Off-roading

Published: 18 April 2024
Written by Dominic White
No comments
Categories: Ideas About Money

The best option for you may not be the best option. 

A lot of advice articles are based on theory. Theory often does not translate well in real life. 

A few years ago, I had a ‘client’ who, after a consultation with me, clearly felt like I was dictating what he needed to do with his money.

Understandably he fiercely defended his right to choose how and where he and his wife spend their money. 

They were spending/consuming about 14% of their assets  each year and had downsized their home leaving them with mostly cash in the bank.

Action needed

He was reluctant to cut back on expenses  or to take on investment risk required to generate better returns. They actually needed to do both. 

Action taken

As a middle-ground I helped him and his wife invest a large chunk of cash in RSA retail bonds, fixed for a period of 5 years at 10.5%. We used the restart option at 11.5% when the time came.

They slowly cut back their expenses in the end but they did it on their terms. In hindsight I see he just needed to come around to the idea himself. The end result was right.

The outcome is what matters

Are RSA bonds the perfect or even the most sensible investment option. Probably not.

But RSA retail bonds have been a godsend relative to cash in the bank and the couple now earns more income after tax than they spend. 

They also have some capital available to them outside of this structure. And they own a small equity portfolio.

A peer review may point out all the gaping holes in this strategy. 

Expensive financial planning software that optmises on the basis of 70 000 data points in a monte-carlo simulation (yes fancy words to impress) absolutely certainly would.

Sub-optimal investment strategy. Not as tax efficient as it could be. Sure. 

But you know what – This couple is better off than the path they were on.

Could they have been even better off? Yes of course.

But they changed their behaviour on their own terms and eventually got things done. They could stick with what was put in place, the importance of which is actually massively underestimated in real life planning. 

How do you determine what level of success to ascribe to this outcome?

Based on whose definitions?

Based on what measurements?

Off-roaders don’t go for optimal they go for what works

Commentators and pundits like to portray options as black and white.

It is convenient for product sellers to convince us there is only there to be a single right way to get things done. Their product right.

The off-roaders out there like to be a bit more adventurous.

I can work with off-roaders. I do work with off-roaders. 

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Best Investment Strategy

Published: 12 March 2024
Written by Dominic White
No comments
Categories: Ideas About Money

The best investment strategy for you is unlikely to ever be the best investment overall in any given year.

The quote in the graphic above comes from this article on Citywire. It is funny  but it has a serious side. 

Low cost Funds

I am a big fan of using low cost index funds. They make sense to me in most circumstances.

The basic premise is captured really well here  – Buffet explains why passive investing is a winning strategy. (No really you should read it).

This does not mean that I think passive investments won’t underperform ever.

It means I believe that over the long-term (10 years plus):

Lower costs plus market returns = PASSIVE

will beat

Higher costs attempting to capture mispricing of value, thematic investing, predicting the economy and market timing = ACTIVE

In my  mind it is accepting that it is hard to pick winning strategies consistently over long periods – see graphic below.

This matrix shows how different things you can invest in (also called asset classes) performed over the last 10 years (by calendar year).

The colour-coding is designed to make comparison a little easier. (Let’s be kind, finance people are human and don’t always achieve their goals….)

But the idea is pick a colour (asset class) and move through the years.

Chances are you will notice some trends that develop.

Appreciate the trends

They are true for each asset class to varying degrees:

1. No single colour stays at the top consistently. 
2. No single colour stays at the bottom consistently. 
3. If you have been at the top recently, you are likely to find yourself close to the bottom at some point (soonish). 
4. If you have been at the bottom, you are likely to find yourself near top spot at some point (soonish). 
5. The only thing certain is the impossibility to predict which will happen when. 

What can you do about this?

Accept that trying to pick the right investments year-in-year-out is tough.

Give yourself your best chance of success by investing to a goal or time horizon.

This will help limit the downside potential in shorter-term objectives. 

It will allow you to capture more upside for longer-term goals. 

You will very rarely be the best performer in any given year but overall you are likely to make the best progress to the outcome you want.

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Money Management Trade-Offs

Published: 29 February 2024
Written by Dominic White
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Categories: Ideas About Money

Money management is full of trade-offs.

You usually have to give up something to gain something. This is required in your personal finances, financial planning and even investment strategy.

Finding the balance for what works for you is crucial.

1. The trade-off between rational and reasonable:

When fine tuning your personal finances (CREATING ORDER), it might not be rational to spend R3,000 on shoes this month, but it might be reasonable.

The rational spreadsheet would certainly not include that line item.

But if it allows you to stay committed to the greater spending plan in the months ahead (and have something left over to invest), then perhaps it is reasonable.

Feeling like you are unable to live life in the present often leads to a plan being abandoned all together.

Rather make reasonable decisions and progress.

2. The trade-off between flexibility and returns.

A good example of a trade off in financial planning (HAVE PURPOSE) is illustrated in the tax planning element.

You want to pay less tax? Of course you do. It increases your returns or what you get to keep.

Well then you are going to have to put your money into accounts which gives you some tax relief. Such as Retirement Savings accounts.

But you lose some access to your money when you save in a retirement fund*. In an Retirement Annuity, for example, you can only access funds at age 55.

And when you access your funds, you have to use two-thirds of the money to buy an annuity income of some sort (Life or Living).

You have less flexibility around your choices but you did get to grow your funds without paying tax.

AND you could contribute to retirement funds before paying tax. This is definitely a worthwhile boost upfront.

3. The trade-off between certainty and returns.

 

When structuring an investment solution (MAKE PROGRESS) we typically want high returns with little to no downside.

But the real world does not work that way.

The mix of assets we have available to invest in have different characteristics. This means they respond differently to each other during the investment cycle and have different jobs to do for you. 

‘Income assets’, like bonds and cash, give you more certainty about your returns. But the price of the certainty is lower returns.

Whereas ‘growth assets’, like shares and property, provide less certainty about your returns short-term. However, over the long-term you probably grow your money much faster.

Your investment mix (asset allocation) is therefore a trade-off between certainty required and returns required.

Each objective you have, will have a required return and a level of certainty required, depending on your time horizon.

*If you want to understand your options and trade offs when it comes time for you to start accessing or consuming your savings (your annuity options are all about trade-offs too) you should join for a workshop. I have set up an interactive workshop to help those approaching this critical time of their lives with the foundation knowledge they need to make the tough trade off decisions – You can find out more at YOUR RETIREMENT QUESTIONS ANSWERED. 

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Top Investment Performer

Published: 23 January 2024
Written by Dominic White
No comments
Categories: Ideas About Money

Top Investment Performer – Anyone can generate a one-year return which looks amazing. Understanding how it was achieved and for what purpose is even more important. Context is important.

This is a screenshot showing an actual return from a portfolio I manage on my offshore platform of choice.

The GREEN line shows the portfolio performance and the BLUE line returns from a Global Stock Index. 

Looks pretty good right?

Should be used in some kind of marketing strategy right?

But do you know what it does not tell you?

  • How much risk was taken to achieve this return. And by risk I don’t mean volatility or how values fluctuated through the year. I mean the opportunity for a permanent loss of capital.
  • What was the performance of this portfolio for the 5 years before 2023? If it was -80%, then these returns are still some way off of delivering any value.
  • What was the objective of the portfolio? If this was a safe ‘I potentially need to spend the money in the next 12 months’ type portfolio, was this investment strategy appropriate?
  • How much of this persons overall wealth does this portfolio represent?  If this is their fool-around-money then it changes the perspective entirely. It is easy to take big risks and earn big returns when there is nothing really at stake. 

When you are reviewing your returns, it is important to make sure you put them in context.

This is not about chasing the highest returns.

You are playing your own game.

You invest with your PURPOSE in mind and measure your results on that.

Read more about how to consider context in your money management: HOW WELL IS YOUR MONEY DOING?

Or if you want some support to set up and invest a portfolio directly offshore? Let’s chat.

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It is not the drill that we want but the hole.

It is not the investment itself that has value, but rather what that investment allows or achieves which is most valuable.