|
Audio Version
|
According to Stats SA, annual consumer price inflation decreased to 4.6% in July. This marks the lowest inflation rate in three years, matching the 4.6% recorded in July 2021. But how does this match your personal inflation rate?
We draw on a recent article by Ninety-One where they compare personal inflation rates for a selection of household products from 1986 with the official Stats SA rate.
Compounded Annual Growth Rate (CAGR) of a selection of household products – 1986 to current
The table shows that the average annual price increase for these household products was 9.1%, compared with the official Stats SA rate of 7.5% over the same period. While the household goods’ annual increase may not seem significantly different, the long-term impact is substantial.
As an example, if you earned R10,000 a year in 1986, you would need to earn R150,000 today to match the official inflation rate. However, to keep up with the actual increases per the selection of household goods, you would need to earn R260,000 a year. The chart below illustrates the corrosive effect of long-term inflation.
South African inflation rate (yellow line) compared to a basket of household goods (blue line)
To continue affording goods and services while their costs increase, your wealth needs to grow at least at inflation or better, i.e. achieving a real return (a return above inflation). If not, you are getting poorer as inflation erodes your purchasing power.
Therefore, relying on cash or income-yielding investments is not a sustainable long-term strategy, as they will not produce a real return after tax, over time.
How to achieve real returns
A portion of risk / growth assets should form part of your investment portfolio to increase returns above “safe” interest earned from the bank. These risk assets are most commonly in the form of equities (shares), property, and bonds, both local and offshore. As they have different risk and associated growth profiles, i.e. equities experience greater fluctuations than bonds, each asset class produces different returns with varying degrees of volatility.
Therefore, following a measured approach is necessary, including diversification between different lower and higher risk assets. The best investment strategy consists of the right mix of assets to meet your investment goals.
The graph below illustrates the different growth trajectories of these asset classes:
The chart above should be understood for illustrative purposes and does not constitute as a guaranteed outcome.
As an illustration, here are the nominal returns of different asset classes over the past 20 years:
| Asset Class | 20-Year Return |
| SA Equities / Shares | 10.0% |
| Global Shares | 15.0% |
| SA Bonds | 8.6% |
| SA Money Market | 7.0% |
| SA Inflation | 5.6% |
Determining the amount of your savings that should be allocated to each asset class depends on your personal risk profile. Your risk profile is established by matching your desired investment return with the amount of risk you can afford to take and your personal appetite for risk.
Conclusion
To beat inflation, you need to include an element of growth /risk assets in your investment portfolio. Having the correct asset allocation based on your personal risk profile, managed by investment specialists, should see you achieving real returns into the future.
Our Advanced Financial Planning Process is designed to help you evaluate and restructure your current investments, effectively combating the long-term effects of inflation.
Contact us at info@investonline.co.za or call 021 001 2323 to arrange an introductory meeting with one of our Client Portfolio Managers.
