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Cape Town - If you want to preserve your current purchasing power, you need to make sure you invest your savings to grow in line with inflation, warns Nico Coetzee, executive: business development at PPS Investments.
Consumer inflation (CPI) has hit a four-year high and breached South Africa’s target range of between 3% and 6%. Year-on-year (y/y) it climbed to 6.3% in July, and then to 6.4% in August.
Inflation is a general increase in prices over a sustained period of time. Consider this: in 1996 a litre of unleaded petrol cost R1.74. Around the same time, a standard movie ticket – which now sells for over R50 – would have cost less than R15.
Getting down to basics, a loaf of sliced white bread costs twice as much today as it would have a decade ago, says Coetzee.
Coetzee says most of us will be familiar with the concept of inflation and the resulting pressure on our pockets.
However, he warns, we should consider the impact inflation has on our investment strategy.
Consumer spending trends
Findings of a study into consumer spending trends released this week showed that consumers spend the same or more on DStv than on retirement annuities.
The study - carried out by analytics consultancy Eighty20, which analysed South Africans' spending habits using Statistics SA’s latest income and expenditure survey - found consumers are also neglecting education spend in favour of alcohol, cigarettes and clothes.
South Africans spend almost four times more on alcohol and cigarettes than on medical expenses, and over one-and-a-half times more on clothes than on education, the study revealed.
Head of Eighty20 llana Melzer says debt is major concern, as access to credit shapes consumers' spending habits.
Of the 18 million consumers having open credit accounts, 11 million have a clothing credit account. In contrast, 2.4 million have a mortgage, she says.
Head in the sand
On top of spiralling debt, consumers are constantly faced with price increases in items ranging from food to fuel to education.
The petrol price, for instance, has risen by more than 560% over the last 15 years. This is equal to an increase of nearly 14% y/y.
"Even this average increase of 14% per year does not sound so bad, until we realise that our salaries did not increase that much every year," says Adriaan Kruger.
Says Coetzee: "As the prices of goods and services rise, the purchasing power of money declines. Simply put, R100 stashed under the mattress will buy less in future than it can today.
"To put current figures in context, you would now need to spend an average of 6.4% more than a year ago to maintain your basic lifestyle."
To increase purchasing power in future, you need to target investment growth that exceeds inflation, he advises.
Some tips to achieve this:
Equities still the best inflation beater over time
Although subject to short-term volatility, equity is the asset class most likely to deliver inflation-beating returns over the long term.
People with an investment horizon of at least five years could, therefore, consider a significant exposure to equities in their investment portfolios.
To simplify matters, you could consider investing in an inflation-linked unit trust. These unit trusts have inflation-related targets set as their performance benchmarks. You are, therefore, easily able to select a unit trust that seeks to deliver on your return objectives.
For example, investors with a higher risk appetite and longer investment horizons could consider a unit trust with a performance objective of CPI + 4% or more.
Investors with lower risk appetites and shorter to medium-length investment horizons could consider targeting growth that equals CPI, or outpaces inflation by 2% or so.
Watch out for fees
Investors should keep in mind that investment fees will ultimately lower their investment returns and the percentage by which inflation is outperformed, says Coetzee.
That makes it important to ensure that your chosen investment offers a competitive fee structure.
"By making appropriate investment decisions and ensuring that investment fees remain reasonable, an investor can make headway in preserving purchasing power even when CPI inflation is making the headlines," says Coetzee.
- Fin24
Consumer inflation (CPI) has hit a four-year high and breached South Africa’s target range of between 3% and 6%. Year-on-year (y/y) it climbed to 6.3% in July, and then to 6.4% in August.
Inflation is a general increase in prices over a sustained period of time. Consider this: in 1996 a litre of unleaded petrol cost R1.74. Around the same time, a standard movie ticket – which now sells for over R50 – would have cost less than R15.
Getting down to basics, a loaf of sliced white bread costs twice as much today as it would have a decade ago, says Coetzee.
Coetzee says most of us will be familiar with the concept of inflation and the resulting pressure on our pockets.
However, he warns, we should consider the impact inflation has on our investment strategy.
Consumer spending trends
Findings of a study into consumer spending trends released this week showed that consumers spend the same or more on DStv than on retirement annuities.
The study - carried out by analytics consultancy Eighty20, which analysed South Africans' spending habits using Statistics SA’s latest income and expenditure survey - found consumers are also neglecting education spend in favour of alcohol, cigarettes and clothes.
South Africans spend almost four times more on alcohol and cigarettes than on medical expenses, and over one-and-a-half times more on clothes than on education, the study revealed.
Head of Eighty20 llana Melzer says debt is major concern, as access to credit shapes consumers' spending habits.
Of the 18 million consumers having open credit accounts, 11 million have a clothing credit account. In contrast, 2.4 million have a mortgage, she says.
Head in the sand
On top of spiralling debt, consumers are constantly faced with price increases in items ranging from food to fuel to education.
The petrol price, for instance, has risen by more than 560% over the last 15 years. This is equal to an increase of nearly 14% y/y.
"Even this average increase of 14% per year does not sound so bad, until we realise that our salaries did not increase that much every year," says Adriaan Kruger.
Says Coetzee: "As the prices of goods and services rise, the purchasing power of money declines. Simply put, R100 stashed under the mattress will buy less in future than it can today.
"To put current figures in context, you would now need to spend an average of 6.4% more than a year ago to maintain your basic lifestyle."
To increase purchasing power in future, you need to target investment growth that exceeds inflation, he advises.
Some tips to achieve this:
Equities still the best inflation beater over time
Although subject to short-term volatility, equity is the asset class most likely to deliver inflation-beating returns over the long term.
People with an investment horizon of at least five years could, therefore, consider a significant exposure to equities in their investment portfolios.
To simplify matters, you could consider investing in an inflation-linked unit trust. These unit trusts have inflation-related targets set as their performance benchmarks. You are, therefore, easily able to select a unit trust that seeks to deliver on your return objectives.
For example, investors with a higher risk appetite and longer investment horizons could consider a unit trust with a performance objective of CPI + 4% or more.
Investors with lower risk appetites and shorter to medium-length investment horizons could consider targeting growth that equals CPI, or outpaces inflation by 2% or so.
Watch out for fees
Investors should keep in mind that investment fees will ultimately lower their investment returns and the percentage by which inflation is outperformed, says Coetzee.
That makes it important to ensure that your chosen investment offers a competitive fee structure.
"By making appropriate investment decisions and ensuring that investment fees remain reasonable, an investor can make headway in preserving purchasing power even when CPI inflation is making the headlines," says Coetzee.
- Fin24
