What you need to know about the impact of inflation

By: Submissions

When it comes to investment risks, one that investors seem to overlook is the risk that their money may not be able to grow enough to keep up with inflation. It can play a significant role in the protection of an investment and therefore, should be taken into account when evaluating the potential success of an investment.

What is inflation?

Length of time and compound interest are your best friends when growing your money. However, it’s possible for the value of your money to decrease over time, meaning youmay not be able to buy as much with the same amount of rands, as the prices of services and goods increase. This is known as inflation. It begs the question, ‘what does the impact of inflation have on planning for retirement as subsequently investment decisions?’

The not-so-obvious risk

As an investor, it can be critical to understanding the investment risks that you may face, and which decisions may be best for you. If you are someone who isn’t comfortable with fluctuations that can affect your returns, conservative investments may be worthwhile.

However, as mentioned above, a less obvious risk that conservative investors may encounter is that their returns may not keep up with inflation.

Consider buying power

Buying power can be considered to be the best way to measure your wealth instead of how many rands you have available. So, it’s recommended that when assessing returns, look at the ‘real return’, which is the return you can receive after inflation instead of the ‘nominal return which shows the growth of investment before inflation.The returns on your investment should, at least, be enough to meet inflation so that the value of your money can be sustained.

Generally, a largeportionof returns on your investment compensates for inflation before real turns are earned. For example, if you had invested a R10 000 lump sum in equities, an average balanced fund, or an average money market fund, in the majority of cases,inflation would likely have accounted for the biggest piece of the return.

When looking at investments that are designed to provide you with an income, e.g., a living annuity, it it’s typically wise to consider inflation when looking at potential withdrawal rates and asset allocation; today, it's possible that you need to live off your pension for 15 to 20 years Even though you may be drawing an income, invested money can be left to grow which can provide you with extra support over time.

In a nutshell, it can be valuable investing a portion of capital in assets that have the potential to grow.

The trade-off between investment risk and the returns you may receive can, more often than not, be based on your current financial circumstances, therefore the decision you make, can be very personal.

If you feel a bit overwhelmed by all of this, then think about consulting an independent financial adviser to help you with your investment management strategy. He/she can tailor itto assist in the maintenance and/or growth of your money to ultimately achieve your goals.

By S N Chatterjee

Copyright 2020 © S N Chatterjee - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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