By Samuel Rossouw

January 4, 2025

2025 has arrived, bringing with it a sense of optimism about our financial prospects. South Africa remains stable following the 2024 elections despite the ANC’s support dipping below 50% for the first time. The stock market has grown by 6.4% over the past 12 months, and the bond market has surged by 18.90% (measured up to the end of November). Interest rates are declining, and economists predict improved investor confidence and consumer spending.

My New Year’s resolutions always include a financial goal. Two decades ago, my colleague used three wealth-building principles in his presentations to new clients. These principles remain as vital today as they were 20 years ago. In a world where we are exposed to cryptocurrency, the “Magnificent Seven”, and banana art, I believe it’s time to revisit and master them.

1. The power of growth over time

Albert Einstein referred to compound growth as the eighth wonder of the world. Investors who understand this principle benefit greatly, while those who ignore it face long-term consequences. Below is a graphic showing the fund value of an initial investment of R100,000 plus monthly contributions of R5,000 (increasing annually by 5%), growing at an average of 11% per year. After 5 years, the investment is worth R611,608, and after 10 years, it is worth about 2.65 times more at R1.6 million. By year 45, however, the fund’s value reaches almost R139 million – 227 times the 5-year value. The difference between the fund value at 30 years and 45 years is an astounding 469%. What’s even more striking is that after 45 years, the growth on the investment is 13 times greater than the total contributions made during the entire period.

2. The impact of negative growth or losses

The South African property market achieved an average return of just 8.3% annually over the past five years (up to November 2024) despite two exceptional years (28.3% in 2024 and 36.9% in 2021).

In contrast, the local stock market delivered an average return of 12.5% over the same period – 50% higher than property. The significant difference can be attributed to the property market’s 34.5% loss in 2020. Despite better performance in the past two years, the property sector still couldn’t outperform the stock market.

3. The leveraging effect of financing

When applied correctly, this principle can create substantial wealth, particularly in property transactions. If the cost of capital is lower than the return on your investment, leveraging can dramatically boost your returns. However, this strategy comes with great risk: losses can escalate significantly if the cost of capital exceeds the return rate. Therefore, this approach must be used cautiously and with expert advice.

Conclusion

There are several key takeaways from these principles, summarised as follows:

• Compound growth works best over long investment periods. Start saving as early as possible. It may not always be easy, but disciplined financial habits are crucial. Sacrifices in the short term will undoubtedly bear financial fruit in the long run. Unfortunately, there are no (relatively safe) investments that can guarantee a rapid rise in wealth.
• Avoid retiring too early. Early retirement disrupts the effects of compound growth. For example, note the difference in fund values after 30 and 45 years. While not everyone needs to work until 70, drawing from your fund at 55 can have problematic long-term consequences.
• Investment returns are not linear. In 2024, the average South African-focused equity fund grew by 16% (measured to November), with an average return per year over the last 5 years of 10.53%. However, in 2023, the average return in South African-focused funds was only 2.58%, with an average return over the previous 5 years of 8.88%. Patience is the key here.
• The effect of negative growth significantly impacts long-term average returns. Plan your investment strategy to mitigate potential downturns. A 30% loss requires a 43% gain just to recover.
• Resist the temptation, however big it may be, to invest in overvalued assets. Limit or avoid exposure to assets trading at unsustainable valuations.
• Build a well-diversified portfolio across different asset classes, securities, and shares.
• Leverage isn’t just about taking loans to make investments. For example, instead of overpaying your home loan, you could direct those funds into investments, achieving a positive leveraging effect. By making smart adjustments – such as contributing to your retirement annuity and using tax benefits to invest further – you can effectively lower your cost of capital.

As we’ve said many times, no one knows what stock prices will do today or tomorrow. But if you understand the basics of wealth creation, start saving early, remain patient, and follow a sound investment strategy, financial success is well within your reach.

Samuel Rossouw is a certified financial planner at Woodland Wealth. Contact him at info@woodlandwealth.co.za.

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.