In our industry, there is a very high focus on returns. If you open the financial magazines you’ll see everyone advertising that they have the best returns over some time - we’re talking about 10, 12, 15, 20% returns. What is important, however, is what this return means to you and your financial plan, and your goals that you are actually trying to achieve.
So, what you really should be focused on is the real return that you are getting. A real return is the return you are getting over inflation. Inflation is the greatest enemy for any investor - we need to be outperforming inflation. As an example, if inflation was sitting at 5% and you’re getting a 10% return that equates to a 5% real return. This is what’s important.
What is also important is that there is a real return after tax. So in other words, if you are saving at a bank and you’re maybe getting a 7 or 8% return, after tax depending on your tax rate you could very well be keeping up with inflation or even falling behind.
History shows us that, in the long run, the place you will get a real return is in the equity market, that is, in the share market. So, to achieve a real return in the long run you have to have a certain amount of exposure to the equity market, which in turn means there will be some volatility in your portfolio.
Remember, stay invested, don’t try and time the market - it’s time in the market that counts.