What is the safest long-term investment?
26 September 2016
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On mobile, on digital, on demand, this is Old Mutual Live Money Coach. Hello and welcome, my name is Chris Gibbons. We focus once again on savings and investments and have a question from one of our listeners, David. who emailed me to ask the following: What is the safest long-term investment? Interest earned is not the major indicator here, he says, say if we have a global economic crash or even a local one, what do I stand a chance to lose the least on? Property, retirement funds, stocks or even Kruger Rands?
David’s question confirms what psychologists and behavioural economists have known for years, ordinary human beings have a greater fear of loss than they have a need for gain. That can and does affect how we invest. We’re joined now from Johannesburg by Anchor Capital Analyst, Lee Cairns. Lee, welcome to Old Mutual Live Money Coach, thank you for your time.
Lee Cairns: Thanks Chris.
CG: It’s an interesting set of options from our listener, David, but I think it centres around that classic question; what is the safest long-term investment? First off, before we broke them down, how would you approach that problem?
Cash is not king as a long-term investment
LC: Okay Chris, thanks, it’s an interesting question. First of all, it’s something that’s not unique to David nor to anyone else. It’s first coming to figuring out where they want to invest money. I guess it’s different for people of different ages. I’m led to believe that David’s slightly younger and has got a longer runway ahead of him from a timeline, so that makes it a little easier.
The answer I’m going to give is a little controversial because he’ll naturally be assuming that my go-to answer would be to sitting in cash. Which is the place where he’d be most likely to lose the least, which is part of his question.
In fact, I’m going to say that cash is the one asset class to give him a loss over a long period of time. Because his income tax, net effect of what he’d get is guaranteed to lose to inflation. If that scenario happens over 5-10 years, it would be quite catastrophic on his investments. That’s just the answer on cash. The putting it on its head as to what people would assume when they’re looking for the absolute safety.
Then obviously you also sit with the balance sheet risk of the bank that you choose to sit with cash. The people that did that with Leman’s, they obviously lost everything for taking zero risk. Having zero upside potential by doing so. Even cash has some risk element in that regard as well.
CG: You need to have a little bit of cash on hand, a couple of months’ worth, if you can, in your savings account for emergencies. But as you say, long-term, as an investment, it’s not even to be thought about.
CG: Let’s break down those classes mentioned by David. Property first off, that’s usually a good one.
To invest in property or not
LC: It is usually a good one. I think it’s been a really good asset class in South Africa which most people are tempted to invest with the rear view mirror in mind. We’re a little wary of South African property at the moment because of the interest rate hike expectations. So generally not the asset class to be sitting in if you’re expecting an interest rate cycle to be increasing, which we do.
Building a long-term portfolio, got no problem with building it. In fact the South African market is littered with really good off-shore property stocks, the likes of Rock Castle, etc. I’d happily buy some of those now if I knew I was only going to look at them in 5-10 years’ time. Over the shorter term, certainly the SA denominated property stocks are probably going to have a troubled time over the next sort of 2-3 years.
CG: Retirement funds, RA, there are tax advantages there. It’s also quite heavily protected?
LC: Yes, the vehicle obviously inside itself has a whole host of different asset classes. So the retirement fund in itself is the broader vehicle. Inside that you’d have to break it down. I like the retirement funds for people that lack the discipline to put money away. Inside that, the limitations to the 25% offshore can be a negative, in my view. For someone young enough to be exposed to more than 25% to offshore.
Certainly it allows for the discipline, it’s money that can’t be touched easily. There are tax efficiencies in it. It’s a vehicle that does host investments, but it doesn’t come without certain costs. Certainly doesn’t protect anyone from a market crash. It still has the same moving asset classes inside it that are still subject to the movements of a market correction.
Buy stocks and start buying young
CG: Talking about markets, stocks, also known as shares, can be risky, can be very risky at times. But can also offer a very good rate of return over time.
LC: Yes, I think for any young person – when I say young, anyone that has still got a 20 years plus horizon in their career – to own less than 50% stocks I think will always be a regret when looking back, regardless of the time that they got in.
I completely understand that at the moment the assumption is that markets are looking quite heavy and we haven’t had a correction for a long time and therefore I’m going to sit out. But that conversation has happened probably 5-10 times over the last 5-6 market cycles. Every person that we’ve ever hears that’s timed sitting out through a market correction has always regretted that they stayed out there during the recovery. So what you gain by being out, you normally give out by sitting out through the recovery cycle as well. Stocks must be held and more stocks and quality stocks the younger you are.
CG: Kruger Rands, is there a real different Lee between a Kruger Rand and just straightforward gold or even just a gold fund?
LC: There is a bit of a difference. We’re normally not pro-Gold during periods. Because we find it difficult to understand the underlying value of gold. But we have actually added it to our portfolio as a bit of an insurance. The reason that I quite like Kruger Rands as just a gold ETF; is that it does have an ability to trade at a slight premium. Because of the uniqueness of the Kruger Rand throughout the world.
So physical gold but also not just physical, but physical in the design of a Kruger Rand. I’ve been very happy to have conversations with people that say: I’d like to hold gold. I’ve said that Kruger Rands are a decent option, so long as there’s a safe place to house it and within a reasonable percentage.
We think at the moment, depending on the age if someone wants to hold up to 5% in and around that level, we don’t think that right now is a bad time to consider that. Considering what the global economic climate is looking like, so not a bad thing to consider.
How to make use of government bonds
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. One asset class that David didn’t mention in his question Lee, government bonds. Which up to a point can be tax free?
LC: Chris, I much prefer the government bonds. Then from that, obviously, corporate yields as well, to cash. You can get a lot more upside without the necessary downside. Of course there are some warning signals to the impending downgrade that would suggest that it’s not totally risk-free.
But I do think you can be specific within the government bonds as to which ones you choose. At least get the potential of performing at inflation after you’ve paid your tax. If you get the tax-free option, obviously the upside to some real return is there without taking on a huge stock risk. So I think still a decent thing to have a look at as part of your portfolio.
CG: Let’s end off, if we may, but just re-emphasizing that question about age and time. A younger investor has a very different perspective from an older investor, why is that?
LC: Just a time frame Chris. If we look at the time frame of what markets globally have done over 50 years and more. That volatility that is emphasized when you focus on a very short period. When that timeline is drawn out of 50 years, those hiccups tend to almost be insignificant on that graph line.
With that in mind and with the general direction being upward, if someone can sort of get that understanding at the beginning of their investing career. Not second-guess it once a correction happens because they’re inevitable. They will happen, however, they will recover and continue in their upward trajectory. That over a 20-30-year period you needn’t be worried about the timing of being in. There are opportunities to be in and just stay the course. In an asset class that will always outperform, the time period is obviously the allowance to do so.
CG: Bottom line, younger investor, at least 50% in the stock market?
CG: There we’ll leave it for today. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons. With me on the line from Johannesburg has been Anchor Capital’s Lee Kearns. Remember, please feel free to get in touch any time if you have any questions for me, topics you’d like covered on Old Mutual Live Money Coach. Please feel free to send them direct to me at firstname.lastname@example.org. I would be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.