I have always maintained that investing is not rocket science. It all depends on how much you save and for how long.
There are times that the financial industry does itself a disservice in making it all seem far more complicated — offering investors over 800 unit trusts is a case in point.
So I really like the research that retirement fund administrator 10X (tennex) has done in promoting a retirement annuity that simply tracks the index.
Having tested all 35-year intervals over the last 100 years, the worst performance from the market was a 5% real return per annum (ie: 5% above inflation). So that means at worst case scenario your money would have increased more than five times in today’s value. The best 35-year investment period delivered 11% above inflation per annum — your money would have increased 46 fold, in real terms!
So just by saving 15% of your salary each month for 35 years and just getting market returns, you would have saved around 15 times your annual salary in the worst case scenario.
But the really interesting figure is that over a 20-year period only 5% of unit trust funds outperform the JSE after costs.
That means that by investing in a unit trust fund you have a 95% chance of underperforming the market over the long-term.
The one-year figure is better, showing that 39% of fund managers performed above average but over five years, which includes the 2008 crash, only 14% outperformed which kind of kills the argument that fund managers can apply asset allocation and reduce exposure when markets crash — only 14% got that right.
One of the main reasons a fund manager will underperform is due to costs. For example, if you take a R1Â 000 contribution for 40 years growing at a real return of 5% with no costs, one would have saved R1,5-million — of this R500Â 000 is made up of contributions and R1-million is growth.
A 1% cost reduces this investment to R1,1-million, a 3% cost reduces the final amount to R720Â 000.
Steven Nathan, CEO of 10x puts forward a very simple argument. Just invest your retirement funds in an index and you will get a return 5% above inflation.
They have back tested a portfolio made up of 60% equities, 15% international equity and 25% bonds in order to comply with prudential investment guidelines required for retirement funds.
The figures show that over any 40-year period since 1900 the average real return from this portfolio is 5,4% after costs (the figure is 5,2% over 20 years). This example reduces equity exposure as you get closer to retirement.
These figures add to the tracker vs active investment debate, but it is also important to point out that even a tracker fund has costs so it to will underperform the market. Ultimately it all comes down to who can deliver market-linked returns at the least possible cost.
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