A Fin24 user is looking for a sound investment that will also beat inflation. He writes:
I am a pensioner. I own property and receive a pension. I have R1.5m in cash to invest.
Would like to invest in a safe, sound, secure, inflation beating investment.
READ: Looking for inflation beating investments
Carol Axten managing director of Mazars Financial Services, responds:
In this question reference has been made to finding a secure, stable, inflation beating return for a R1.5m capital lump sum.
Inflation is one of the biggest risks anyone in retirement can face and it is very important to outperform inflation over time.
Inflation is basically the increase in prices of goods and services over time. If one takes the South African inflation rate, which was recorded as 5.90% in October, and add the percentage annual income withdrawal, which we will assume is 5%, then the portfolio needs to deliver a return of 5.9% + 5% = 10.90% (after tax and fees) as a minimum return over time to ensure that capital is not eroded.
In South Africa currently a good quality money market fund is yielding in the region of 6% to 6.5%. One would still need to deduct tax from this.
It is, therefore, apparent that an investment into cash alone, which is the most secure investment available with no volatility, will not be able to achieve the goal of inflation beating returns.
One would need to increase the risk of the portfolio by adding some of the other assets classes including, but not limited to equities, bonds and property.
A financial adviser would be in a position to assist with this as it really does depend on each individual's unique circumstances.
In this example it appears that rent is covered as the property is owned and there is a pension. I have assumed that this pension is for life, is linked to inflation and covers the monthly income requirements.
The nature of the lump sum in question then is altered as these assets could typically be passed onto beneficiaries in the form of inheritance in the estate.
These beneficiaries are typically younger and do not rely on the assets to survive, which means that one can then assume a higher risk and therefore a higher potential return over the longer term.
By adding to equities one does increase the volatility of the portfolio, but also the potential returns.
Often when investing one needs to not only consider what risk one wants to take on, but also what risk one needs to assume to ensure the stated objectives can be achieved.
This is a balancing act that should typically have professional insight from someone who is qualified in this area.
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