Financial Planning & Wealth Management

The best asset class

I only own stocks (equities). Either locally or offshore. I don’t own any bonds and only have cash for short term expenditures. Oh yes. I also have a flat in Joburg that I’m trying to sell.

I think stocks (ownership of companies) is by far the best asset class. Simply because this asset class generates the highest returns, repeatedly. In addition to better returns, this asset class is highly liquid, so you can get your money out within a week. Two weeks if it’s physically out of the country (a portfolio in Guernsey, for example).

The chart below shows returns across South African asset classes over the past 90 years. Equities win by quite a long way.

The chart below shows returns across the various OFFSHORE asset classes over the past 95 years. Again, equities wins.

But this is looking back over the past 90 years. Do these trends still play out for shorter, more recent time periods?

Let’s have a look at how the JSE All Share Index fared against bonds and cash for shorter time periods. The chart below illustrates –

Chart: JSE All Share vs cash vs bonds; 2000 to present

Total returns for equities (JSE All Share Index) since 2000 is 1827% (!), which is more than DOUBLE what you got from bonds (733%). And bonds generated a not too shabby 9.71% per annum over the period.

Let’s look at the same chart for shorter time periods.

Chart: JSE All Share vs cash vs bonds; last 10 years
Chart: JSE All Share vs cash vs bonds; last 5 years
Chart: JSE All Share vs cash vs bonds; last 3 years
Chart: JSE All Share vs cash vs bonds; last 1 years

I realise you may not be able to see the numbers in the charts above, so I created the table below. But try to zoom in on the charts. The intention is to show the volatility of each asset class.

Table: Local asset class annualised returns

What all these charts have in common is 1) equity generates the highest returns, and 2) the route the equity markets take to get the higher return is never in a straight line.

That’s the one disadvantage of equity. It’s volatile. In the short term, emotions drive prices, not fundamentals. In the covid crash of 2020, for example, equities dropped 35% in a matter of weeks. You needed a strong stomach to hold through that, but if you did, you were well rewarded.

I would also observe the worst time to invest in local equities was 10 years ago where the annualised return was 8.92% per year over 10 years. That’s not bad for a worst return period, especially since equity returns aren’t taxed (unless there is a disposal).

Let’s look at how offshore asset classes have fared.

Chart: MSCI World Index vs offshore cash vs offshore bonds; Since 2005
Chart: MSCI World Index vs offshore cash vs offshore bonds; last 5 years
Chart: MSCI World Index vs offshore cash vs offshore bonds; last 3 years
The table below shows annualized returns by asset class if you can’t read the graphs (all in ZAR).

It’s not at all surprising that global equity (represented by the MSCI World Index) hands down beats offshore cash and bonds. This pattern has repeated for the past 100 years.

Let’s look at how the JSE performed against the MSCI World Index (in ZAR terms).

Chart: MSCI World Index vs JSE All Share Index since 2005

Global equities are in the lead if we start in 2005, but the local markets’ annualised return of 13.38% is still pretty good. I don’t know anyone that would say no to this type of return.

I created the table below to illustrate the performances for local and offshore equities over different time periods. All return numbers greater than a year are annualised.

Table: Annualized returns SA vs the World

Now, any reasonable portfolio should include a healthy allocation to both the local market and offshore markets. Combine the two over any of the time periods above and there are very few people I know that would be disappointed with the result.

My conclusion – if you don’t need your money for the next 2/3 years, equities is the best place to be.

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 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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