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Invest to outperform inflation

Nov 07 2016 14:24
Carin Smith

Cape Town - Due to the impact of inflation, consumers now need to spend an average of about 6% more than they had to a year ago to maintain their current lifestyles, cautions Tandisizwe Mahlutshana, executive of marketing at PPS Investments.

This is because currently, the Consumer Price Index (CPI) inflation is roughly around 6% - the most common measure South Africans use to monitor inflation. According to Trading Economics, inflation reached a high of 20.9% in January 1986 and a low of 0.20% in January 2004. The inflation rate has, however, rarely averaged less than 6% over rolling 5-year periods since 1968. It averaged 9.27% from 1968 until 2016.

"Saving is not difficult. What is difficult is changing our mind set when we think about money. Forget about instant gratification. Think about what will happen to you if something unexpected happens," Mahlutshana told Fin24 on Monday.
"If only we can switch our minds around to say the importance is not what I can get today, but how I can take care of my life should something unexpected happens."

He thinks this lack of a savings mind set is one of the reasons so many South Africans are indebted. They do not save for a rainy day. Then, when something unexpected happens, they go for a loan, which then reduces their disposable income.

"That repayment of the interest on the loan could have gone into your savings," says Mahlutshana.

His advice is to start saving - in other words "pay yourself first" - from your very first pay cheque.

"People are always surprised about the amount of money they have to save for retirement, because they start saving late," he says.

Mahlutshana explains that, although prices will naturally increase over time as the prices of goods and services rise, the purchasing power of your money declines.

Last week, for example, the price of petrol rose by over 40c and the price of 95 octane petrol has risen around R2 per litre since March 2016 with the inland price now at R13.05.

"If you fill up with 95 octane three times this month and own a car with a 40 litre tank, this will now cost R1 566 for the month - up R240.  While this may not seem like much to some, consider that a mere 13 years ago - in 2003 - it would have cost just R480," said Mahlutshana.   

"It is critical that what you save today for retirement accommodates the potentially reduced purchasing power of your savings when you retire. To preserve your current purchasing power, you’ll need to ensure that your savings are invested not only to grow in line with inflation, but to exceed it."

READ: Inflation moves outside target band in September

He explains that for investors seeking to preserve their purchasing power, there are various types of investment solutions that are geared towards outperforming inflation.

Typically inflation-linked unit trusts, for example, allow investors to beat inflation as they have inflation-related targets as performance benchmarks. A CPI benchmarked investment portfolio typically targets returns in excess of inflation over specific timeframes and risk profiles. 

"The option you choose will depend entirely on your financial goals, time horizon, risk profile and your assessment of your requirements. For example, investors with a higher risk appetite and longer investment horizons could consider a unit trust that aims to outperform CPI Inflation by 4%," explains Mahlutshana.

"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. An experienced financial adviser can help you here."

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