Podcast: Playing It Safe: Understanding Investment Term, Inflation and Long-Term Returns

Volatility is often what investors feel most acutely, particularly during uncertain market periods. However, as Kingsley Williams, Chief Investment Officer at Satrix, highlights in this Ghost Stories conversation with The Finance Ghost, over the long term it is not volatility that does the greatest damage. It is inflation.

The discussion centres on a powerful idea: the greatest risk for investors may not be taking on too much risk, but rather, taking too little. For those seeking to grow capital over time, understanding investment term, inflation and diversification is central to achieving meaningful long-term outcomes.

Investing Is Not the Same as Saving

A key distinction in the discussion is the difference between saving and investing.

As Kingsley explains, investing is inherently a long-term and risk-based activity. Its objective is to grow capital in excess of inflation. If that objective is not present, the activity more closely resembles saving, where the focus is on preserving purchasing power rather than growing it over time.

This distinction is important, as avoiding risk entirely can undermine the goal of achieving long-term growth.

Investment Term Changes How Risk Should Be Understood

Investment term is one of the central concepts in the discussion.

Over shorter horizons, outcomes are highly uncertain, with returns influenced by both known and unknown factors. As the time horizon extends, however, the range of probable outcomes narrows. Analysing multiple rolling periods across longer timeframes provides a clearer sense of what has historically been typical for different asset classes.

What becomes evident is that the probability of loss for growth assets, such as equities, declines over longer holding periods.

Time is not neutral in investing, as it plays a critical role in shaping which risks persist and which diminish.

Volatility Is Not the Same as Risk

Volatility is often used as a proxy for risk because it is observable and easy to measure. It reflects the variability or “bumpiness” of returns.

However, Kingsley distinguishes between volatility and more meaningful definitions of risk. In particular, he highlights two that are more relevant for investors: the risk of permanent capital loss and the opportunity cost of not taking sufficient well-rewarded risk.

A volatile asset is not necessarily a poor long-term investment. Equally, a smoother return profile is not inherently safer if it fails to deliver the return required to meet long-term objectives.

This is why the idea that “the greatest risk is not taking any risk” sits at the centre of the discussion. It reflects the need to consider risk in context.

Opportunity Cost Matters

Safer assets such as bonds may reduce the likelihood of short-term losses, but this does not automatically make them the better choice for long-term investors.

As Kingsley explains, equities have historically delivered higher average returns over longer periods. While the difference may seem modest on an annualised basis, it compounds meaningfully over time.

For investors with sufficient time horizons, avoiding appropriate equity exposure introduces a clear opportunity cost. The trade-off is not simply between risk and safety, but between short-term comfort and the long-term outcome.

Inflation Is a Long-Term Threat

Inflation emerges as one of the most significant risks discussed.

Kingsley draws an important distinction between inflation levels and inflation surprises. While markets can adjust to expected levels of inflation, unexpected changes can materially affect asset prices, particularly in fixed income investments such as bonds.

Because bonds are priced based on assumptions about future inflation, a shift in those expectations can lead to significant repricing.

Equities, by contrast, offer a degree of long-term protection, as companies have the option of adjusting pricing in response to rising costs. This makes them more aligned with the objective of delivering returns above inflation over time.

Long-term investors, have the luxury to focus more on maximising real returns (in excess of inflation), irather than minimising volatility.

Diversification Must Be Properly Thought Through 

Diversification is essential but often misunderstood, as its primary purpose is to reduce company-specific risk where individual businesses may fail due to factors unrelated to the broader market.

However, diversification is not achieved simply by increasing the number of holdings. Portfolios can remain highly concentrated if underlying exposures are similar across sectors, geographies or business models, while fewer holdings may still provide diversification if the underlying businesses are broad and varied.

Kingsley also highlights that attempts to address concentration, such as through equal weighting, can introduce unintended consequences, including sector biases, geographic tilts, liquidity constraints and higher trading costs.

Diversification can also be achieved efficiently through Satrix ETFs, which provide access to a variety of different  market exposures that can be used to target various investment opportunities.

The key takeaway is that diversification requires clarity. Investors should be explicit about the risks they are trying to manage.

Tax Efficiency Matters, But Total Return Matters More

The discussion concludes with a focus on tax efficiency. Tax, alongside costs, is a key driver of long-term investment outcomes, and vehicles such as tax-free savings accounts and retirement annuities can provide meaningful advantages. However, Kingsley cautions against focusing on tax efficiency in isolation, as the primary objective remains maximising total return over the appropriate time horizon. Tax-efficient structures should therefore support that objective, not override it.

Conclusion

Short-term volatility can be uncomfortable, but long-term investing is not about avoiding fluctuations, it is about taking appropriate, well-diversified risk over time to achieve returns above inflation.

In this context, the risk of playing it safe may be underestimated, and for investors with longer time horizons, understanding investment term, inflation, opportunity cost and diversification remain central to achieving their objectives.

Closing Thought

For long-term investors, the challenge is not simply managing volatility but ensuring that portfolios are positioned to maximise real returns over time.

Listen to the full episode and explore the key insights.

Disclaimer

Satrix Managers (RF) (Pty) Ltd is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts, Exchange Traded Funds (ETFs) and Actively Managed ETFs (AMETFs), the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of ETFs and AMETFs, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs and AMETFs are registered as a Collective Investment and can be traded by any stockbroker on the stock exchange, LISP platforms and / or via online trading platforms. ETFs and AMETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance, and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions is available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF and AMETF Minimum Disclosure Document. AMETFs are ETFs are actively traded by a Portfolio Manager to adjust the AMETF holdings and asset allocation with the aim to outperform the benchmark. AMETFs differ from ETFs which only track indices. The Manager does not provide any guarantee, either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF and AMETF Minimum Disclosure Document and/or on https://satrix.co.za/products.