Sechaba Gqeba Welcome to the "Eight Steps
to Financial Fitness" with Old Mutual, I am your host Sechaba Gqeba. So, in the previous workshop,
we spoke to Michael about diversification, risk, and time. Today, we're joined by Zain Wilson,
and we're speaking about long long-term investing. What is long long-term investing?
Zain Wilson That's a great question,
and I think especially given the year we've had, when you've had very volatile markets. And I mean,
if I think about a friend that called me in July, she has been looking after her dad's retirement.
And she calls me in the middle of July after the markets had a 30% draw down and was like,
what do I do now, Zain? Because I've obviously seen my mom's savings being cut from X to 70% of
that. And it's a very emotional thing, right? When you have this massive volatility and big
draw downs in the market. And I think, like a lot of things that we deal with when we think about
short versus long term, the temptation is when you have an event or something happening today,
you get sucked into "how do I react?" And you're not proactive about what your long-term plans are.
So, when we think about long-term investing, we kind of split into two core things.
The first thing is completely emotional. So, that's exactly what I just described to you now,
and if I can compare it to if you're studying for an exam, if you're going on a new diet,
or if you are beginning a new exercise routine, or you're training for a sport. When you've had
a long layoff and you start after a long period of time. So, I think, for myself, I run quite a
lot. And then I took a break. And that first run that you start again after three months off is
horrible, it's horrific. You don't want to go out, you don't want to get up in the morning. The first
kilometre is horrific, your legs feel horrible. And all you think about is the short-term pain
that you experienced today. But the reality is what you're running for is for a long-term plan,
you know it's good for you, you know it's gonna make you healthier and fitter. So, if we take
our minds psychologically, and emotionally away from the event that happens today, and the pain
you feel today, and you align your kind of habits and your planning with the horizon that you're
actually trying to achieve your goal in. That's the first key thing about investing. It's about
aligning your horizons with what your goals are. So, objective-based investing. The second part,
which is kind of about how assets generate returns in the long term, right, it's about compounding.
And there's a great quote by Albert Einstein, and I'm sure I'm gonna butcher it.
But the quote is basically: "Compound investing is the eighth wonder of the world. Those who know it,
earn it, and those who don't, pay it." And there are two parts to this. So, the first part is,
if I had to give you R100 today, and you had to assume like that R100 grew by 10% a year, I'm not
going to ask you to answer it, don't worry. Our brains think... the way our brains do that maths,
right, we will think okay, how long does it take for that R100 to double and become R200? Like the
intuitive thing you think of is 10% a year, it should take 10 years, right? And then your money
doubles. But the power of compounding is that actually, when you have R100 at the beginning
of the year, and it grows by 10. By the time you start year two, you have R110, and that's growing
by 10%. So, actually, by the time you get to the end of 10 years, you don't have double your money,
you have 2.6 times. So, the compounding is about that extra interest and extra return you get over
a long period of time. So, the first part is that we call it reinvestment component of compounding.
The other part about it or the most important part about compounding is actually time. So,
time is your friend. So, same example, over 10 years, you go from 100 to R260. Over 20 years,
you go to R770, so it does more than double, and over 30 years you go to, I think it's R1800.
So, I obviously did those numbers before I handed in and just think it up on the spot. But the key
message there is like the time, right. Sechaba Gqeba
But is this what compounding is? Zain Wilson
Ja. Compounding is... if you think about it in a sports kind of analogy,
at a very high level of competition, right. The difference between the guy who comes first,
so Usain Bolt, and the guy comes 10th, is all those marginal differences in his training, in
his starting, in all the bits over time, and even those individual marginal differences add up. They
add up a three or four second lead when it comes to the final race, but you don't see it in the
incremental gain, you only see it over time. Sechaba Gqeba
And how do shares respond to time? Zain Wilson
Shares are probably the most bipolar example in investing of how they respond to time. So, if I
think in the very short term, on a daily basis, shares can be up 5% or down 5%. And it's kind of
chaos, right, and what shares are responding to in the short term is often news or events
and things that we can't predict, and- Sechaba Gqeba
So, is it safe to go that route? Zain Wilson
It depends. So, this goes back to what are you
investing for. Sechaba Gqeba
Okay. Zain Wilson
I don't know anyone who invests for a day. You should align your investment strategy with the
horizon you're trying to save for, right. So, most of us are investing for our home or for our kids,
or for our retirement. And that's not a one- or two-day horizon, or even a one-year horizon.
It's a 10, 20, or 30-year horizon. And the key point here is that, although there's a lot of
volatility and noise in the short term, if you think about what shares do over the long term,
what actually happens is it increases your chances of growing your money, because you compound at a
much higher rate than you would compound versus cash. And I can give you an example of what those
numbers are in a second. But the other important part is, as you stretch your holding period out,
so I hold my shares for 10 years versus one day, then your chances of having losses decrease. So,
we looked at 90 years of data, so a lot of people say long-term investing, and they talk about five
years or 10 years. When we look at 90 years of data for the SA equity market, so that's the JSE
basket of shares in South Africa diversified. Over any single year period, your odds of getting
negative returns are fairly high. Well, not high, I don't want to say that. But as you roll
out to 10 year periods, your chances of getting a negative return is only 1%. So, if you split those
two things, the fear of the short term over one day versus the returns you get over the long term,
you can see how it fits to the kind of exercise analogy, right? You don't want the short-term
pain. But to get that long-term return, you have to be invested. And you have to be invested in a
diversified basket of shares. Sechaba Gqeba
You are right about people being discouraged easily, but why shouldn't one disinvest when the
stock market goes up and down? Zain Wilson
So, where does your money go to, I guess, is the question. So, that the two polar opposites, and
what people tend to do is, you either have stocks or shares, and you have cash, right. And again,
we'll take it back to the long-term example. Over the last 90 years, shares have given you 13.7%
over 90 years on average, and cash has given you 6.9%, right. So, we touched on the effect of
compounding, and how that's kind of exponential in how it creates returns. So, the gap between
what you'll grow with your shares versus what you grow with cash becomes exponential.
So, the temptation is you have a market crash, right, like we had this year, and things are
horrific, and everyone panics. And then equities and shares go down, and you want to take your
money out and put it in cash. Sechaba Gqeba
Should you then? Zain Wilson
No, because what that's gonna do is you take your money, you put it into cash,
you're guaranteed to get right now three and a half percent, but you're guaranteed to get nothing
more than three and a half percent. Sechaba Gqeba
Okay. Zain Wilson
Whereas buying shares when they've come off, as long as you're buying a diversified basket
of shares that give you exposure to the best companies in the country,
which is what the JSE will do, then the hurdle of passing three and a half percent is quite low,
especially if you think about the longer horizon.
Sechaba Gqeba And how does time affect the
value of cash in the long run? Zain Wilson
The main thing with cash is that... so, shares 13.7%, cash 6.9, right.
So, 6.9% sounds fine, it's not like you're getting negative returns and you get certainty,
so you're not going to lose your money, and the fear with shares is you lose some of your money.
But the problem with cash is that 6.9% is only a little bit higher than inflation.
So, inflation is average 6% over the last same period 90 years.
And if you're investing in something that gives you 6.9% versus your... the value of
your money is decreasing by 6% a year because of inflation, so your cost of living is going up,
then you're only actually growing your money by 0.9% after inflation a year with cash. So,
go back to the example where you had 10% over 10 years, right, you turn
R100 into R260. If that was in cash returns, that would turn R100 into R109 over 10 years.
Sechaba Gqeba Okay.
Zain Wilson So, it becomes
impossible to meet your investment goals if you're investing in cash over longer periods of time.
Sechaba Gqeba Okay. So, Zain, if someone is listening to
this video, or watching this video, and taking from it and wanting to invest,
what would you recommend for them to invest in? Zain Wilson
I would say that the first thing is to make sure you're -
Sechaba Gqeba Looking at it from a long-term perspective?
Zain Wilson Always make sure that you're,
one, you start off with your plan. And your investment style and strategy is aligned to
the horizon that you're saving money over, right, and most of us are saving 10 plus years. So,
10 to 30, it depends where you are. And if you're saving over that horizon, the bulk of
your savings must be invested into assets that give you that ability to grow your wealth. So,
it's not necessary that you're gonna have 100% of your money in equity because sometimes that does
poorly. Sometimes it does better. But you need to have it invested in a portfolio of assets which
gives you enough growth assets so you can increase the chances of meeting your long-term goals.
Sechaba Gqeba I love it. Thank you so much, Zain,
this has really been educational. Zain Wilson
Great. Thank you, Sechaba. Sechaba Gqeba
All right. I think the one thing that I've taken from this particular workshop
is we need to think long term and not look for instant gratification. Just remember to look out
for more of those workshops taking you through your journey of financial fitness. My name is
Sechaba Gqeba, till next time. Transcribed by https://otter.ai