Investing to secure our long-term financial future, which involves trying to understand future inflation and determining what we’ll need to maintain our standard of living, is no easy task. Add to that the uncertainty of our times – with the United States implementing a new tariff regime and ongoing wars in both Russia and the Middle East disrupting global markets – and it would be entirely understandable if someone hesitated to take on risk. After all, shying away from uncertainty is a deeply human response.

Yet experience has taught us a valuable lesson: if we hope to achieve our long-term financial goals, we need exposure to riskier assets. How, then, do we navigate the uncertainty that comes with this exposure at a time of heightened volatility?  

One powerful way to gain perspective is to zoom out and examine what markets have done over the long term. “We’ve learned from 95 years of market history that the biggest risk we can take is taking no risk at all,” says Fred van der Vyver, Head of Corporate Savings and Income at Old Mutual.  

Here’s why. 

The other lane always appears to be moving faster

Looking back at returns from different asset classes over nearly a century, the data confirms what we know from theory: equities are the best-performing asset class over the long term (see Figure 1).

Figure 1

According to Van der Vyver, there are two key takeaways from this data. “First,” he says, “Our target of delivering 5% to 6% real return over the long term is based on actual data over a very long period. Second, and more importantly, if we truly want to do what is necessary to meet our long-term goals, we have to take risks by investing as much as possible in equities,” he says.

Of course, while this is obvious when looking at long-term graphs, it's a very different story when you experience this in real life. That’s where emotions start to get in the way.

Van der Vyver compares this to driving on the freeway during peak-hour traffic. No matter which lane you choose, the one next to you always seems to be moving faster, so you switch. “The problem is, everyone thinks like that, and everyone moves to the faster lane, and then that lane becomes more congested than the rest and moves slower.” You would have been better off sticking to the lane you know from experience is fastest for the entire journey.

The same is true in investments, as illustrated in figure 2. In 2015, global equities performed as expected compared with other classes: they delivered the best returns. But in 2016, they dropped sharply, and one could understand why a person would be tempted to switch lanes at this point. In fact, in 2022, of the 10 asset classes illustrated in this figure, it dropped right down to 10th place in 2022. 

“The point is this: if we think we can consistently pick the top-performing asset class every year, we’re fooling ourselves,” says Van der Vyver.

Figure 2

Consistency is key, and diversification helps with this 

While it is clear what needs to be done, doing this is not necessarily simple, because financial markets carry real and significant risks. “As much as we want to achieve high real returns, there is a secondary element that needs to be considered,” says Van der Vyver. “We want to achieve those high real returns with the greatest possible level of consistency.” 

Van der Vyver says they measure consistency by looking at rolling seven-year periods, which aligns with when they begin derisking out of the growth portfolios. “In other words, over a seven-year period, how reliably did a strategy deliver the returns we were targeting?” 

“You would think that global equities would be the asset class that delivers those real returns most consistently,” says Van der Vyver. But Figure 3 shows that global equities delivered a return of more than inflation plus 5% only half the time. “If you were fully invested in global equities, you would have hit your target only half the time.” However, a balanced fund with high global equity exposure would have allowed you to achieve your objective 80% of the time.

Figure 3 

“We often think of diversification as dialling down risk at the cost of returns,” he says. But what diversification does very well is improve the consistency with which you hit your target.” 

The evidence is clear: a high allocation to equities is essential for long-term performance, and diversification helps you reach your investment goals more reliably over time. The key is to stay the course and resist the urge to change lanes during times of volatility.