Looking for inflation-beating investments


A Fin24 user is looking for inflation-beating savings or investment options. She writes:

I've been saving R1 250 in a notice account at the bank but have come to learn that after a year the money saved is worthless due to inflation.

I would like to invest this money in a way that that can beat inflation. I am looking at saving or investing over a five-year period with increases of 10% pa on the investment.

Please help.

Andrew Duvenage, a CFP® Professional, Director at NFB Financial Services Group responds.

The fact of the matter is that South African investors are faced with negative real interest rates at present. What this means is that the return being offered by cash or money market instruments (somewhere between 4% and 5.5% currently) is below inflation.

The picture is even worse if tax is applicable on the interest generated by cash, with such investments often generating net after tax returns of 3%. When one compares this to current inflation of around 6.5%, it is clear to see that the purchasing power of cash will be eroded by inflation over time.

As such, we do not believe that cash investments are a viable long-term investment strategy. In order to generate investment returns that beat inflation over time, the reality is that investors have to add risk to their portfolios.

This is done by introducing allocations to other asset classes such as property, bonds, equity and offshore investments. The manifestation of risk is volatility, meaning that as one introduces risk assets into a portfolio, the potential for volatility in the value of the investment increases.

There is no “one size fits all” level of risk that should be added to a portfolio, so the following factors need to be considered by an investor:

Attitude towards risk. Are you willing to accept short and medium term volatility in order to generate long term returns?
Time horizon. The longer one is able to invest funds, the better the ability to absorb volatility.
Do you need an income from your portfolio? D
rawing income on a high volatility investment can capitalise losses.
Rate of return you need on the portfolio.
The higher the return requirement, the more risk assets will be required to meet that requirement.
The overall
portfolio size. When larger asset bases are in play, investors generally have a greater capacity to absorb volatility.

There are various mechanisms available to investors, and the most appropriate one will depen on your personal needs, tax profile, amount available for investment and level of expertise.

Options range from direct share portfolios and index funds through to actively managed fund investments. You need to carefully consider the tax implications and cost of the various investment vehicles, together with the factors mentioned above.

One of the most flexible investment options is unit trust-based investments. These investments have the following benefits:

- They can facilitate a monthly cash flow.
- They can provide professional management and expertise to investors on relatively small amounts of money.
- They can provide access to asset classes that an investor may not be able to access with a relatively small amount of money.
- They can give access to multiple asset classes within one investment (especially important for investors who do not have the risk appetite to invest purely in equity).
- They can provide active management around the asset allocation.

It may be an option to look at asset allocation funds, with the risk level dependent on the above factors, as a long-term investment solution.

It is a good idea to talk to a qualified and independent financial adviser to assess your needs, circumstances and risk profile so that you can find an investment with the highest likelihood of meeting your return expectations at the lowest level of risk.

- Fin24

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