How investors can beat inflation
July 2024
Every Australian knows that a dollar doesn’t stretch as far as it used to. In 2023 alone, the price of goods and services across a range of categories increased by 4.1%, according to the Australian Bureau of Statistics. That figure is the change in what’s known as the Consumer Price Index (CPI) indicator.
Back in 1973, a kilogram of potatoes cost around 31 cents. By the end of last year, the same sized sack of potatoes costs closer to $3.80. In 1976, you could see a movie for about $3.30 – now it’s about $24 for a standard seat in a cinema, and that’s before you throw in a choctop and popcorn.
But did you know that inflation has a real impact on investments too? Growth assets – such as shares, property and infrastructure – are generally expected to increase in value over time. This can help the value of your investment keep pace with (perhaps even get ahead of) inflation.
On the other hand, defensive assets like cash and fixed income don’t tend to generate capital gains – which means that inflation can erode their value. For example, a 5% return on term deposits might seem like a good outcome – but if inflation is running at 6%, its actually going backwards.
This is an important principle for people of all ages to grasp.
For retirees, keeping the purchasing power of income in line with costs is essential to having the confidence to live their best lives. After all, a savings pot of $500,000 might last for 30 years when inflation is 2% -- but run out in only 20 years if it reaches 5%.
Other age groups with longer to retirement have time on their side, so it’s important to maintain long term allocations to growth assets and resist the temptation to switch to cash in down markets. It’s just as critical to not chase gains from assets that benefit from inflation, such as gold. The problem with such a strategy is determining when to sell gold and buy back into other investments – getting that timing wrong can result in disappointing returns.
Of course, growth assets can experience more short-term ups and downs than defensive investments and cash, but in general their value is expected to rise in the long run.
Speak to your adviser to find out more.
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