The Covid pandemic of 2020 was a frightening episode. The JSE all share index lost 20% of its value by March that year, and the S&P 500 suffered a similar drawdown in dollar terms. Yet something predictable then followed.
Between January 2020 and July 2024 share market returns have outperformed bonds and cash by large margins. The R100 invested in the JSE immediately before Covid with dividends reinvested would now be worth R173. Had the R100 been invested in the S&P 500 it would now be worth significantly more — R236. The same R100 if invested in the bond index or in a money-market fund with interest reinvested would have grown to only R144 and R130, respectively.
This was a predictable outcome given the large outperformance by a representative share portfolio on the JSE since 2000, or for that matter also since 1980 or 1960.
The R100 invested in the JSE index in 2000 would have grown to R2,152, which is 21 times at an annual average rate of return of 13.12%. The R100 in the money market would have grown 6.3 times and the bond index by 10.6 times over the same period. Incidentally, the JSE has kept up with the S&P in rand terms over these 24 years, outperforming significantly until 2010 and underperforming since.
The JSE has therefore recovered well from periodic drawdowns since 2000 — 40% down in 2002, 51% in 2008, 24% after Covid and 15% with Fed tightening in 2022.
Equities are expected to give superior returns because they are more risky to hold than cash or bonds. These higher returns compensate for the different risk of losses investors believe they are exposed to by holding shares. Higher expected returns mean lower entry prices for investors, all else remaining the same. And these expected extra returns have been delivered to date by most stock exchanges.
Share prices move each day about an average of close to zero. They demonstrate a random walk, hopefully with upward drift to give the expected positive returns over the long run. The more difficulty investors have in interpreting the news about a company or economy, the wider the daily swings in prices in both directions.
This volatility gives rise to an objective measure of risk reflected in the cost of an option to insure against volatility. Investors can buy or sell a volatility index, the VIX, based on the underlying volatility of the S&P 500. When S&P volatility (risk) rises, share prices fall, and vice versa They do so to improve or reduce prospective returns in a statistically significant way, as has again been the case this year.
Yet were share market returns measured over longer periods, the risk of an in-period loss falls. The average returns when investing on the JSE or S&P are similar when measured over one-, five- or 10-year periods. Since 2020, returns on the S&P index averaged 14% over one year and 11.1% and 11.2% per annum when calculated over consecutive five-year and 10-year periods.
However, the standard deviation of returns about the average has been far higher for one-year returns (13.87) than for five- or 10-year returns, at 2.93 and 1.96, respectively. The same relationship holds when the analysis is taken back to 2000. Risks (the standard deviation or volatility of returns) have fallen sharply when the investment period is extended beyond one year. Absolute losses when returns are measured over five- or 10-year periods occur rarely. It usual takes financial crisis.
The extra expected returns for extra equity risk apply to the averagely risk-averse investor with limited wealth. When you are investing for your children and grandchildren and their children, and are wealthy enough not to have to worry about being forced to cash in your shares, you can invest without much risk — and you can expect to pick up the money left on the table by the more risk averse.
That’s further support for time in the market — not timing the market.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.