WORDS ON WEALTH:
Investment experts harp on about how you need to be in growth assets (read “listed shares”, or equities) to enjoy inflation-beating returns over the long term. This advice is sound, based on stock market performance over many decades.
However, when pressed to define “long term”, the experts become a bit vague. How long is “long term”: five years, 10 years, 20 years?
The shorter the period over which you invest (your “investment horizon” in finance speak), the higher the likelihood that growth assets, which are volatile, will disappoint. This is evident in the performance of unit trust funds over different periods:
- Over 20 years to the end of June, according to ProfileData, Consumer Price Index (CPI) inflation averaged 5.49% a year, and South African general equity funds delivered an average of 12.95% a year, handsomely beating inflation by 7.46%.
- Over 10 years, inflation averaged 5.19% and the equity funds returned 7.9%, translating into an annual real (after-inflation) return of 2.71%.
- Over five years, even if you ignore the body blow of Covid-19, the JSE has performed miserably: while inflation averaged 4.9%, equity funds delivered only 0.65%, meaning in real terms the return was -4.25%.
Which shows that you cannot be reasonably assured of positive real returns from growth assets over five years.
And 10 years? Here’s a scenario: what if you invested five years ago and the JSE performs as miserably over the next five years as it has done over the last five, which is not outside the bounds of possibility? You would not be a happy investor.
Therefore, in my book “long term” is at least 15, preferably 20 years. If you have an investment horizon of 20 years or more and will not be dipping into your investment during that time – in other words, forgetting about it and letting it reap the benefits of compounding – then growth assets are the way to go.
To compare, how have diversified funds performed over these periods, on average?
- High-equity multi-asset funds: 12.33% (6.84% real) over 20 years, 8.48% (3.29% real) over 10 years and 3.68% (-1.22% real) over five years.
- Low-equity multi-asset funds: 10.50% (5.01% real) over 20 years, 7.69% (2.5% real) over 10 years and 5.12% (0.22% real) over five years.
So neither quite match equity funds over 20 years, but they provide palatable returns over 10 years. However, over five years, the high-equity funds delivered a negative real return, while low-equity funds barely kept pace with CPI.
Which brings me, in a long-winded, roundabout way, to the subject of this column: RSA Retail Savings Bonds. These are very low-risk, cost-free, interest-bearing investments provided by the National Treasury for ordinary South Africans that offer competitive rates for investors with a horizon of 10 years or less.
There are two types:
1. Fixed-rate bonds: these currently offer 5.25% annually over two years, 6% over three years and 8% over five years.
2. Inflation-linked bonds: these offer 3.5% annually over three years, 4.5% over five years and 5% over 10 years while your capital is adjusted by the CPI inflation rate. So the returns are real.
Interestingly, until an amendment in 2018 to the legislation governing the inflation-linked bonds, the real rate was a floating rate. This meant that if you invested when the rate was 3% and it subsequently dropped to 2.5%, your rate would also drop to 2.5%. However, according to the RSA Retail Savings Bonds website (https://secure.rsaretailbonds.gov.za) and verified by a media spokesperson at National Treasury, the amendment introduced a fixed real rate. So if, for example, you invest now in the 10-year bond, you will receive an after-inflation return of 5% for 10 years, which is the highest it has been in the history of these bonds. Quite a contrast from the declining interest rates on bank deposits.
A few features of retail bonds (pros and cons)
- The rates are determined by the bond market and not by the repo rate for banks as set by the SA Reserve Bank.
- Your money is locked in for the entire term, and there are penalties for early access.
- You can invest only lump sums of R1 000 or more, and the maximum per individual per type of bond is R5 million. In other words, you can have R5m in fixed-rate bonds and another R5m in inflation-linked bonds.
- You pay tax on interest, as you would in a bank deposit, subject to exemptions.
- A positive aspect of the fixed-rate bonds is that if, after a year, the rate has risen, you can “restart” your investment at the higher rate.
- Interest is paid out, or reinvested, every six months. Pensioners in fixed-rate bonds can receive monthly payments, but this does not apply to inflation-linked bonds.
- The 2018 amendment also did away with nominated beneficiaries. When you die, the money goes into your estate.
PERSONAL FINANCE