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Investment Strategy
Sunday, August 1, 2010
JSE index story

The past three year performance for local equities has been dismal – essentially flat at 0,25% per annum over this period. “With this type of return it is only natural that clients question the feasibility of investing into equities, despite the fact that longer run numbers paint an improved picture, with the five year compounded return at 16,25% and that over 10 years at 16,37%,” comments Ian de Lange of Seed Investments.

Investors tend to extrapolate both superior and poor recent performance into the future. Having suffered 0% in the market when cash returned almost 10% per annum, it’s natural that investors will underestimate the change that will occur over the next 10 years.
“We always to advocate the fact that an investor’s exposure to any investment asset should be increased or decreased depending on the valuation,” he says.
“But another factor that hinders long run results is a myopic perspective.” Daily market price movement and attendant increased activity tend to exaggerate investors taking a shorter-term perspective. One way to gain perspective is to take a step back and view an investment portfolio on a regular, but less frequent period than day-by-day or even month by month.
The accompanying chart shows the JSE All Share index on a monthly basis. “Despite the 37% decline in 2002/2003 period and the 46% decline in 2008, the less frequent time does tend to smooth out the volatility. “Investors over a 10-year period to the end of June in this index would have received 16,25% per annum, almost double that of cash.
“This hopefully provides just one view of the importance of having a definite longer term perspective to investing into an asset class that has a long term investment horizon.”

Copyright © Insurance Times and Investments® Vol:23.8 1st August, 2010
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