Inflation is the stealthy killer that reduces the purchasing power of your funds over the long term.
We often consider the volatility of markets to be a risk to our investments. The economy and markets are unpredictable indeed however one risk that is predictable is inflation. Inflation is the stealthy killer that reduces the purchasing power of your funds over the long term.
What you could do with R100 000 in 2010 is far less than what you could do with it in 2015. The danger in investing funds in the long term in cash, money markets, bonds and other income yielding funds only is that inflation erodes its purchasing power over time. Yes, for the past 15 years or so South African markets have experienced a ‘bull market’ but going forward the consensus is a lower expected return across all asset classes. This means that income earning funds, which are considered low risk against market volatility could actually pose the risk of no or little protection against inflation. Some exposure to equity and property asset classes can guard against the risk of inflation.
The key is to speak to your financial advisor about your objectives and needs and the time horizon for your investments. Are you looking for exclusive capital growth, income or both? Certain funds are geared to protect capital but not keep up with inflation. Some funds are geared to protect capital in a three year rolling period and ensure for instance CPI plus 4. Certain funds are geared form maximum return but in an eight year rolling period. Also consider diversification in non-correlating funds. Different fund managers have different approaches and sometimes clients and broker opt to deal with a single balanced fund just to keep it simple but different fund managers have different investment approaches that may work with or against the markets so again spreading your investment with more than one company could prove beneficial. You could keep your investment in one platform yet use different funds building a strategic portfolio. The bottom line is cash; money markets and low risk bonds are suitable for shorter period and are at risk of losing value in the long term. The question you need to ask is can you afford the risk of long term loss?
Article by Geshy Singh