The 10X Investment Strategy
The 10X Retirement Plan has one overriding objective: to minimise the risk in retirement investing by providing every member with their optimal investment strategy for retirement.
One optimal pre-defined investment strategy - no confusing options
There are three parts to any investment strategy:
- Asset allocation: the optimal mix of assets in the portfolio, which sets the benchmark
- Investment style: can you beat the market (benchmark) return after costs?
- Total costs: the investor's return is earned after all costs
We optimise the three parts of the investment strategy
- Because investment returns vary with the investment term (time horizon), asset allocation must be driven by, and actively managed against, the investor's time horizon. We match every investor's asset allocation to their investment term, which is called life stage asset allocation.
- Because active fund management (all relative-return investing) destroys value for 95% of long term investors, we eliminate active management risk by investing directly in the market, with a diversified portfolio.
- Because costs directly reduce the investor's real return (the after inflation return), we dramatically reduce the total costs of investing.
How can we be so sure?
Investors who had contributed 15% of their gross salary for any 35 year period in a retirement fund employing our pre-defined investment strategy, would have met their goal or improved their living standard in retirement every time since January 1900 i.e. a 100% success rate.
The chart above shows the investment value, for 10X's investment strategy, as a percentage of the retirement goal (100% equals the retirement goal) [1] after investing for 35 consecutive years for every period starting in 1900.
A 100% success rate - scientifically tested
- Using 10X's investment strategy (asset allocation, investment style and total costs) and actual market returns over more than 100 years, the 10X Retirement Plan would have met and exceeded the member's goal in every period
- On average, the investment at retirement would have been 90% higher than the member's goal. The member would have always been able to increase his standard of living in retirement. The 10X Retirement Plan is thus a high value solution.
- To measure investment risk we assess the results our strategy would have achieved in poor investment periods. In the worst investment period (1942 to 1976) the investment value at retirement was 9% higher than the goal. In the worst 10% of results our plan would have exceeded the goal by 21%. This shows the 10X Retirement Plan is also a low risk solution.
Investment returns are variable, there is not merely an average outcome.
If Bill Gates (with a net worth around $40 billion) is in a room with nine poor people (combined net worth of $9), the average person's net worth is several billion dollars yet nine of the ten people have a net worth of $1. The average doesn't tell us the distribution of all potential outcomes, it merely summarises the whole range of outcomes in one number. Sometimes the average can be useful other times it can be meaningless or misleading. The cartoon above depicts the six foot fund manager that drowned in a river with an average depth of just three foot! In this case the average was misleading!
The flaw of averages is also true in investing, as to arrive at the average return we merely add up a range of good and bad returns. Investment strategies based on the average return fail to account for the below average returns. Investment risk is managed by determining the range of outcomes and not just the average outcome.
When conducting our back-testing and forward-testing research, we always measure the range of outcomes and not the average outcome. Technically this is known as stochastic modelling (Monte Carlo simulation etc) as compared to deterministic modelling that uses one outcome, which is normally the average.
Forward testing
We have conducted extensive forward testing to determine the likely future success rates of our retirement plan. Because our investment strategy is pre-defined i.e. it does not change, it is important to note that our prospective success rates are dependent solely on the investment return assumptions we input into the mathematical models. If we use the same investment return range (i.e. investment returns by asset class and term) as has been experienced since 1900, then we would have the same 100% prospective success rate.
Historic and projected real investment returns before costs
| Source: Dimson, Marsh, Staunton, 10X Investments | |||
| Average real returns | 1900-2006 | 1980-2006 | 10X Projections |
|---|---|---|---|
| Shares | 7.5% | 8.6% | 6.5% |
| Bonds | 1.8% | 3.7% | 2.5% |
10X Investments estimates future real share investment returns below the actual historic long run return [3], because historically, South Africa's real share returns have been higher than in international markets, and may therefore not be sustainable. We also believe it is appropriate to introduce a safety margin into our future projections. The opposite is true for projected bond returns, which are slightly higher than the long term return since 1900. [4]
The impact of lower projected (assumed) returns is lower projected values and hence lower projected success rates than would have been experienced in the past, which is shown in the graph above. The 100% historic success rate falls to a 90% prospective success rate, while the average investment value at retirement as a percentage of the retirement goal falls from 190% to 161%.
Footnotes
- [1]
- It is estimated that 94% of South Africans cannot afford to retire and more than half of investors contributing to a retirement fund start off with a pension that does not even constitute 28% of their final salary. Source: Bruce Cameron (Retire Right), Liberty Life marketing material, 2007 National Treasury Budget.
- [2]
- Assume an annual salary range between R200,000 - R500,000, investment contributions of 15% of salary with 1% p.a. real growth, total costs of 1.3% (ex VAT) and a retirement goal to pay 70% of the member's real expense base between age 25 to 34 from age 65. Uses actual market returns for period 1900-2006.
- [3]
- We have also assumed higher long term return variability for shares than in the past. This introduces further conservatism into our projections and reduces future success rates.
- [4]
- Projected bond returns are higher than historic long term returns as 10X projects bonds returns using inflation linked bonds (a relatively new asset class, first introduced to SA in 2000) that guarantees a real return around 2.5% p.a. (September 2007).