Question:
Let's think 25 years ahead. If future inflation cannot be known, how could the REAL return be estimated to be an average of 5% pa? Is this an average for a period of a century? What would be the average REAL return for the next 25 years?
Answer:
Rye, The real return on SA equities has been around 7% pa over the past 100 or so years. This is no co-incidence it mirrors the long-term real return expected by investors, representing a risk-free hurdle rate of 2% to 3% (available on risk-free government bonds) and an equity risk premium of 4% to 5%. The real return on other asset classes (cash and bonds) has been much lower, around 1%-2%. Historically, our balanced high equity portfolio (back-tested), has delivered a real return of around 6%. We use 5% to be conservative. There is no guarantee that these numbers will hold up over the next 25 years, but there is also no reason to believe that they won't (perhaps a bit lower, given the above average returns seen over the last 11 years). The lowest real return from shares in the SA market over any 30 year period since 1900 has been 4%, which is higher then the best return from bonds over any of these periods, so it makes sense to have a high allocation to equities if you are a long-term investor.
