Inflation as the enemy of the long-term investor

Countless countries are navigating record-high levels of inflation. Some are even facing triple-digit inflation rates. Globally, Zimbabwe, Lebanon, and Venezuela have the highest rates in the world.

As price pressures mount, 33 central banks tracked by the Bank of International Settlements (out of a total of 38) raised interest rates last year. These coordinated rate hikes are the largest in two decades, representing an end to an era of rock-bottom interest rates.

Going into 2023, central banks could continue this shift towards hawkish policies as inflation remains aggressively high.

If history is an example, taming rising prices could take at least a few years.

Take the sky-high inflation of the 1980s. Italy, which managed to combat inflation faster than most countries, brought down inflation from 22% in 1980 to 4% in 1986.

If global inflation rates, which hover around 9.8% in 2022, were to follow this course, it would take at least until 2025 for levels to reach the 2% target.

It’s worth noting that inflation was also highly volatile over this decade. Consider how inflation fell across much of the rich world by 1981 but shot up again in 1987 amid higher energy prices. Federal Reserve chair Jerome Powell spoke to the volatility of inflation at their November meeting, indicating that high inflation has a chance of following a period of low inflation.

While the Federal Reserve projects U.S. inflation to fall closer to its 2% target by 2024, the road ahead could still get a lot bumpier between now and then.

Braai or CPI: Inflation in real terms.

Inflation is best  illustrated and more easily  understood by looking at the price of a constant product or service over time.

For example, take a look at the table below which shows the cost of a basket of goods to make up a traditional South African braai in 2005, in 2015 and then in 2022.

The only sane definition of money is purchasing power, and as illustrated in the table, over the last 17 years, inflation in South Africa has cut the purchasing power of your (braai) money by over two thirds.

But an investment in the South African stock  market (using the FTSE/JSE All Share (ALSI) as a proxy) has consistently provided protection from this enemy. Consider the following:

• R311.39 invested on the ALSI in 2005 would be worth R2,340.70 by the end of 2022 (By contrast, R311.39 saved in a money market account in 2005 would be R1,055.00 (before tax) over the same period)

What did you have to do to earn this? Two (behavioural) things:

1. Invest and stare out of the window (much harder than it sounds); and
2. Be willing to see your investment value temporarily decline every year without being panicked in to selling.

Just start saving.

I was listening to a podcast of a well-known Financial Adviser where he was asking his guests the following question.

“What (financial) advice would you give to your younger self?”

The responses almost always elicited the same answer…

“Start saving earlier!”

Interestingly, and as an aside, I heard earlier this week that the state of Indiana in the US is on track to join several other states that have recently introduced financial literacy graduation requirements. Wouldn’t it be awesome if we could apply the same here in SA? Perhaps then fewer respondents to the Adviser’s question would reply with the same/similar answer.

Now, it is appreciated that making a lump sum investment may seem quite daunting, especially at the end of a tax year and with the rising cost of living, but if we take heed of the response to the Advisers question above then it is so critical to start and/or to continue and you can do this with very little money. As James Clear, author of Atomic Habits, one of the best books I have recently read says:

“All big things come from small beginnings. The seed of every habit is a single, tiny decision.”

Tax-efficient saving and investing

The following slide was put forward by Allan Gray in a presentation on post-retirement investment strategy a few years ago.

Following this Slide, the ‘Rule Book’ per Allan Gray regarding a successful post-retirement strategy is as follows:

• Rule 1: Plan for a reasonable number of years in retirement
• Rule 2: Invest for above inflation (i.e. real) returns
• Rule 3: Manage volatility (but not at the expense of real returns)
• Rule 4: Draw a reasonable level of income.

Of course, the above is a post-retirement strategy and so it pre-supposes that the investor has arrived at retirement with enough money accumulated in the ‘Work and save’ period above.

Two of the best ways to save and invest (and preserve purchasing power) tax efficiently are via a pre-retirement vehicle such as a Retirement Annuity or with a voluntary investment such as a Tax Free Investment Plan (Tax Free Savings Account)

The end of the tax-year represents an important opportunity for us all to maximise tax efficient savings opportunities, and therefore many of us focus on Retirement Annuity and Tax-Free Investment Plans. Click here to view more on saving tax-efficiently.

You have until 28 February 2023 to maximise your tax incentives before the tax year-end. Contact your Wealth Manager as soon as possible to discuss your unique investment needs. 

Office news

Malan Jonck has joined our team!

We recently welcomed Malan to the extension of our Melrose Arch practice where advisers including Heinrich Richter, Andrew Kurten and Diederick Bisschoff are primarily based in the Western Cape.

Malan began his career in financial services in 1999 when he joined BOE Private Bank as a Portfolio Manager. In early 2000 he joined the FirstRand Group and worked as Regional Manager for Momentum Distribution Services. In 2007, Malan together with a colleague set up the FNB Private Wealth Office in George where he has worked as a Wealth Manager until he joined PSG in January of this year. Malan holds a master’s degree in Clinical Psychology from Stellenbosch. He is also a Certified Financial Planner (CFP). We look forward to adding his expertise to the team!