Cape Town – Analysing long-term data is crucial to the investment process and it also teaches some profound lessons, according to the latest Long-term Perspectives publication compiled by Old Mutual Investment Group’s MacroSolutions boutique.

Understanding these lessons will help you build the right investment solution to achieve your goals, according to this report.

Lesson 1: Inflation is your enemy

Many investors suffer from “inflation illusion” as they don’t notice how destructive inflation can be over time.

We need to look at long-term investment returns in “real” terms, stripping out the impact of inflation.

Lesson 2: Cash is trash

A bank loan exposes you to minimal risk, but there’s a price to be paid for that security.

Cash does not increase your real wealth over time. Over 92 years, cash has an after-inflation return of just 0.7% a year. It is better to own shares in the bank than to leave your money there.

Lesson 3: You need equities

Many investors will not retire with enough money.

We need the higher long-term returns from equities to grow our wealth. This is particularly important in a world where people are living longer.

Lesson 4: Time is your friend

The main reason investors prefer cash to equities is the fear of losing money.

The best way to manage the risk of losing money is to remain invested in equities for longer. As soon as you extend your holding period for more than three years, past performance shows that you wouldn’t have lost money.

Take what happened in 2008: after a negative 30% return, the market rebounded to deliver 14% a year over the following five years.

Lesson 5: Compounding is a powerful wealth generator

Money needs time to benefit from the full potential of compounding growth. Compounding simply means making money on your original investment as well as on the gains made in previous years – that is growth on growth over time.

Start saving as soon as you can, leave it for as long as you can, and let compounding do the work for you. And tick the dividend reinvest box on your investment application form to maximise your growth.

Lesson 6: Don’t put all your eggs in one basket

Equities may have been the best performing asset class since 1929, but cash was the best performer for 11 of those years and listed property for 9 years.

Diversification is the one free lunch in investments. Use it. That is because it pays to invest across different asset classes.

Lesson 7: Asset allocation adds value

Asset classes have distinct secular or long-term periods of under- and outperformance.

Active asset allocation is a vital tool in delivering superior returns.

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