Reality vs. Theory

The path to an investment’s end destination is not level

By Andró Griessel


Have you ever had the experience of consulting your financial advisor for help with your investments and when talking about expected returns, the advisor refers to a long-term inflation-related return, typically inflation + 5% or something similar?

Sometimes a simplified 10% per year, may also be used instead. Fast forward to a year or five years later and your actual experience is something completely different. Was it a misrepresentation, is he or she incompetent, or were they over-optimistic?

It is easy to explain the theory behind it, but I have found that few things help as much as an actual case study, because reality is often much more uncomfortable than theory. And it is precisely this discomfort, and our response to it, that is the greatest destroyer of wealth over time.

See below a client’s experience of returns over the past 15 years (2008 to now) compared to the performance benchmark of inflation + 5% per annum (net of all costs).


The long-term expected real return was and is in the order of 5% per year (5% above inflation).

However, the graph shows that the annual return is almost never in line with the long-term expectation. It was a wild ride of returns that varied between -11.59% and 29.89% in a single calendar year.

Out of the 15 years, nine were better than the target and six worse.

Another way to look at it is perhaps that the endpoint of the blue line is the “promised” destination while the orange line is the journey there. Although the final destination may be at the same altitude as the starting point, the road to get there is anything but level.

It still amazes me how many investors think it should be.

How things actually happened makes for interesting reading.

Due to the “unfortunate” starting point of the analysis (2008 financial crisis), the client starts with a massive backlog (24%), compared to his long-term goal. This backlog, due to its absolute magnitude, causes the “expectation gap”.

It takes a full five years before the long-term return exceeds the expected long-term return for the first time. Over time, the long-term return is achieved and is more and more in line with the expected return, even though the annual variation in growth has not decreased substantially.

A few more points from the analysis that may help with your own investment considerations are the following:

  • Timing of investments plays a role, whether we want to believe it or not. The impact is initially substantial but diminishes over time.

    If the client had started investing 14 years ago instead of 15 years (in other words after 2008), his return would have been “only” 0.6% per year better. It is possible, almost easy, to rectify the effects of a “catastrophic” starting point over time by making decent decisions in the future. However, more often we see the opposite.

  • Returns are cyclical: Apart from being able to vary substantially from one year to the next, there are also longer cycles during which returns are higher or lower than “normal”. It doesn’t mean something about your process is broken.Changing your strategy all the time is similar to someone wanting to use a different vehicle depending on the road’s surface.

    If you are embarking on a 1,000 km journey, you have to decide which is the best vehicle for the whole journey. If 900 km of your ride is a straight tarmac road and the last 100 km is a rough jeep track, you’re going to cover the first 900 km on your Ducati motorcycle in a third of the time if I take my Hilux, but I will arrive at the final destination before you.

    People who try to change their vehicle every now and then will end up in quicksand.

  • The illusion of, or even need for, control over short-term outcomes when operating in financial markets is just that: an illusion. The only thing you can control is the process you follow and, most importantly, your own behaviour.After three years, in the scenario here, many investors would have given up and tried to take a different direction, with probably significant consequences for the achievement of the long-term goal.


A few final pointers about long-term returns, averages, and the like.

  • Investments are a marathon, not a sprint.
  • Your future return is not equal to the historical average return. If you make an investment based on great historical returns, disappointment can almost be guaranteed.
  • Extreme movements in both directions change long-term investment returns in a relatively short time.


There is a fund that became very popular a few years ago among high-asset value clients that produced a nine-year average return of 21% per annum by the end of 2020. R1 million would grow to R5.5 million within a matter of nine years.

The value of that same investment would now be back at R1.4 million with an average return over 11 years of only 3% per year.

The reality for investors in this fund, I’m afraid, is probably much worse than the figures mentioned since very few people get involved in such an investment from day one, but rather invests only once figures like 21% per year for nine years reaches the public domain.

See also what an investor’s experience would be if he were to invest at the beginning of any given year and hold the investment until now.


To achieve the 21% return, you would have to (a) invest right at the beginning and (b) sell everything at the end of 2012.

As the mantra goes: “Investments are simple, but not easy.” Concentrate on the process and your own behavior and the long-term outcome should be positive.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth (formerly ProVérte Wealth & Risk Management). Contact him at

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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