Investors underestimate for how long they will be invested. If you consider someone entering the workforce today, it is reasonable to assume that they have a 70-to 75-year investment time horizon, consisting of 40 plus years’ investing for retirement and 30 years’ living off their accumulated investments in retirement.
Yes, this is an extreme example but even someone mid-way through their working career realistically has a 40-to 50-year remaining investment time horizon. Unfortunately, underestimating your investment time horizon often results in you being too risk averse with what should be viewed as long term investments.
Time horizons are longer than you think
To better understand and illustrate investor holding periods, we analysed the average holding period of clients invested in various products on the
Ninety One Investment Platform. The results are shown in the chart below. To determine the average holding period, we divided the average assets over the year in each product by any outflows from that product over the same year.
Acknowledging that you are likely to have a longer holding period than you realise, and that you need higher exposure to growth assets is important, especially if you are risk averse by nature. This is particularly true when considering that the key output of most financial planning exercises is the estimated investment return required to maintain your standard of living in retirement, and that in most instances you will need to be more aggressive in your investments than you may be comfortable with. However, the reward is very real.
You pay your money, and you take your chance
Consider the outcome for a long-term investor who, unmoved by the above argument, invested into a cautious fund, as opposed to being correctly invested in an equity fund. The following chart illustrates the consequences, where a R1 million investment in the average multi-asset low equity fund (a proxy for a cautious investment) over a twenty-year period would have returned R5.6 million at the end of March 2023, whereas the same R1 million invested in the average South African equity fund would have returned R15.6 million2!
The value of independent investment advice
Given the very real consequences of this decision, we strongly recommend that investors seek professional financial planning and investment advice, tailored to their individual circumstances. Financial advisors will also be able to position the tax advantages of certain product structures that are available on the Ninety One Investment Platform. A more tax efficient investment product wrapper allows for the faster compounding of investment returns.
Written by:
Paul Hutchinson
Ninety One Sales Manager