A report by Old Mutual looks at the long-term behaviour of South Africa’s asset classes and what it means for the future.
Specifically, the report focuses on three main asset classes – equities, bonds, and cash how they have performed historically in South Africa.
“While a bank deposit exposes you to minimal risk, there’s a price to be paid for that security,” the report found.
“Cash does not significantly increase your real wealth over time. Over 93 years, cash has an after-inflation return of just 0.9% a year. It is better to own shares in the bank than to leave your money there.”
Using average returns for each asset class, Old Mutual found that it would take you an average of 10 years to double-your money when placed in equities, 41 years in bonds, and 90 years in cash.
However, Old Mutual also acknowledged that the main reason investors prefer cash to equities is the fear of losing money.
Specifically if the market was to crash, these investors would be relatively unaffected by not having any positions in the market as opposed to shareholders who will have to bare the brunt of lost wealth and the other ramifications of a crash.
The best way to manage this risk of losing money is to remain invested in equities for longer, Old Mutual found.
“As soon as you extend your holding period for more than three years, past performance shows that the chance of losing money become negligible,” it said.
“Take what happened in 2008: after a negative 30% return, the market rebounded to deliver 14% a year over the following five years.”
While investors simply looking to double their money would be able to do it faster using equities, long-term investors will want to have a balanced portfolio featuring all asset classes Old Mutual found.
It added that gold and listed property have also earned money for investors in the past and should be considered alongside the three other asset classes.
“Equities may have been the best performing asset class since 1929, but cash was the best performer for 11 of those years and listed property for 9 years,” it said.