Hit or miss? Will your portfolio perform?

By Maria Smit*

Financial planning is full of quirky sayings and mantras that are designed to help simplify our thinking about key financial decisions. You might have heard of common phrases like ‘The 4% rule’, ‘Sell in May and go away’ or this old classic: ‘Time in the market beats timing the market’.

These help us make sense of what can seem like complex issues, and for the most part I’d say that it helps to listen to them and see whether they fit your circumstances. Because the problem with trying to reach everyone is that our individual circumstances don’t often match everyone else’s.

A good example of this is the so-called 10/5/3 rule. It suggests that, over the long term:

• Equities deliver around 10% per year

• Bonds deliver around 5% per year

• Cash delivers around 3% per year

It’s a neat rule of thumb, but from my standpoint, I don’t believe it’s relevant to South African investors.

Let me explain why I believe that, and how you should rather be thinking about the split of assets in your retirement portfolio.

Why the 10/5/3 rule struggles locally

South Africa is different from developed markets in a few important ways. For a start, inflation is higher and fluctuates more. This means that planning around higher real return assumptions can you’re your retirement plan look healthy on paper but fragile in reality.

Second, returns are volatile. Local equity markets do not deliver smooth compounding – they often deliver bursts of strong performance followed by long periods of frustration.

Lastly, cash and bonds behave differently in South Africa than in developed markets. You’re far more likely to get higher starting yields locally than in overseas, which significantly changes the role that income assets play in your portfolio.

In short, the 10/5/3 rule is overly optimistic in the context of South African portfolios because it isn’t aligned with the local realities.

My suggested South African rule of thumb

Given these disparaties, I use more conservative and realistic investment returns expectations with my clients.

Here it is: The 8/6/4 rule

• 8% from equities
  This assumes a diversified mix of local and offshore shares. Not a pure JSE bet, and not a tech only portfolio pretending volatility doesn’t exist.

• 6% from bonds and income funds
  This reflects South Africa’s higher yield environment, while acknowledging inflation risk, fiscal pressure, and interest rate cycles.

• 4% from cash
  This is a reasonable pre-tax assumption. After tax and inflation, cash mostly preserves capital rather than grows it meaningfully.

This adjustment might look modest, but over a 20 to 30 year period, it makes a material difference to how realistic a retirement plan actually is.

The balanced portfolio reality check

If you’d rather work with one planning number instead of three separate assumptions, here is a practical shortcut.

For a balanced South African portfolio, a long-term return expectation of 5% to 7% nominal per year is reasonable.

That usually means you are holding roughly half to 60% in growth assets, with the rest in income assets and cash. It also assumes something more important than the asset split itself. Time. Enough time to ride through weak markets without abandoning the plan.

Because here is the uncomfortable truth: If your retirement plan only works when markets behave perfectly every year, it is not ambitious. It is fragile.

A good plan must survive bad years. Not just average ones.

Why rules of thumb still matter

At this point you might wonder whether rules of thumb are worth using at all. I’m here to tell you they are.

Not because they predict the future with precision, but because they shape expectations. And expectations shape behaviour.

A sensible rule of thumb can help to anchor your thinking to reality. It reminds you that even conservative portfolios fluctuate and it minimises your shock when markets don’t repeat last year’s strong returns.

The real value of a rule of thumb is not getting the decimal point exactly right, it’s about avoiding assumptions that can lead you astray.

The retirement risk most investors underestimate

In South Africa, the biggest long-term risk we face is not short-term volatility, it’s running out of income while inflation keeps rising.

That is why diversification beats prediction and long-term income sustainability matters more than headline returns. At the root of it all is the truth that discipline matters way more than clever market timing.

One way to stay diciplined is to remember that retirement planning is not about chasing the highest return in any given year. I regularly remind my clients that what matters is building a portfolio that can pay you reliably for 25 or 30 years.

That demands a strong dose of reality, and patience.

So, forget about the 10/5/3 and remember that conditions locally are very different. We cannot plan based on misplaced assumptions because you’re sure to be disappointed with the outcome compared to a locally-relevant asset split.

If investing were predictable, we’d all retire early and argue about padel instead of portfolios.

Until then, keeping it real remains one of the most valuable tools in your financial plan.

*Maria Smit CFP® professional is an advisor at Brenthurst Pretoria