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Growth assets should always beat inflation

By unknown | 2010-05-18 00:00:00.0 | COMMENTS [ 0 ]

I REFER regularly to the obstacles preventing investors from achieving long-term growth.

I REFER regularly to the obstacles preventing investors from achieving long-term growth.

These could be poor markets, the weak rand, international events or taxation, but there is nothing more damaging than inflation.

Investors do not fully comprehend the damaging effects inflation can have on their lives. We hear about it all the time and feel it when we shop , but we are both complacent and tolerant about price increases.

Let me give you an example.

Go into a supermarket and buy R1000 worth of goods. Now remove R500 worth of goods. This is exactly what R1000 will buy you in eight years' time at 9percent inflation.

Though statistics reflect that inflation is low, just look at the price increases on essential products.

l Medical aids up between 9 percent and 20 percent

l Eskom up about 25 percent

l Vehicle and household insurance up between 12,5 percent and 15 percent

l Food prices up 20 percent and 30 percent

l Fuel up 10 percent

Investors need to understand that they cannot expect to invest and beat inflation if they remain invested in money market funds yielding between 7 percent and 9 percent. Growth assets, over an extended period , should beat inflation by between 4 percent and 6 percent a year over the period. In other words, if inflation is 70 percent over a 10-year period, then you would expect your growth assets to have achieved between 110 percent and 140 percent growth whereas, had you stayed in money market, you would be lucky, after tax, to have even matched inflation.

There will always be risk associated with investing in growth assets , but the numbers are proof of this strategy.

I'm a little dismayed when clients ask me to look at their portfolios housed in endowment policies, retirement annuities, unit trusts and even their pension fund, only to find that monies are invested in conservative portfolios for the long term.

Are financial planners making decisions based on the risk tolerance of individual investors who are usually quite conservative? A financial planner's job is to assess investors' long-term requirements, make recommendations according to these requirements and ensure that they understand that their risk profile might be contrary to the investment strategy recommended and subsequently implemented.

Over the past 18 months, it appears that many financial advisers have been wary of the dangers of the market and have taken cognisance of investors' fears, rather than implementing a long-term investment strategy by taking advantage of the lower markets.

Unfortunately, when you look after other peoples' money, the primarily goal must be to try and protect the investment, but this can cost heavily in the long-term, because of a too-conservative approach.

Look at every long-term investment with a view to being much more growth oriented. Don't worry about the short-term fluctuations, which will always occur in any five-year cycle.

l The writer is a financial adviser of Bryan Hirsch Colley and Associates. Email bryanh@bhca.co.za or call 011-880-4888.

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