Long Term Returns

Many retired people have planned reasonably for retirement, yet find that their lifestyle and security is threatened by the need for a greater income than they had planned for.

We believe that sensible retirement planning means aiming to comfortably exceed projections you make based on your current income and living costs. Consequently, our investment approach favours a higher weighting towards growth assets, even for retired investors, than traditional advice usually recommends.

There are two important fundamentals that we believe every investor should implicitly know and understand. These are:

The Effects of Compounding Percentages The Long Term Returns of the Major Asset Classes

The Effects of Compounding Percentages

When relatively small differences in annual returns are compounded over some years, they make a major difference to the total long-term return on investment.

Here's a graphic illustration, based on a R10,000 lumpsum. The lower blue line shows compounded returns at an annual 5%, the top indigo line shows them at 25% annually.

Over 40 years there is about 1000 times greater difference in the total value of the investment.

This table illustrates the same point:

The effect of compounding on returns should be borne in mind when choosing the classes of assets to invest in. Let's take a look at what the average long term returns of these classes are.

The Long Term Returns of the Major Asset Classes

Theoretically, over the long-term all asset classes should tend towards similar returns - but then, how long is the long term, and what about tax? The following table illustrates before- and after-tax returns for the major asset classes over the last 40 years:

Of course, different tax rates on the asset classes have tended to disadvantage certain types of investment. As tax regulations change, so this will change and investors need to be aware of the implications. Equinox.co.za's Funds update will keep you informed.