Staying out of the stock market won’t protect you from inflation…

Fsp Invest, 12 Aug. 2013

Tags: stock market, inflation, savings, savings accounts, risk, nominal, the effect of inflation on your savings

Have you given any thought to what inflation is doing to your savings in the bank? If you don’t at least get an interest rate the same as the rate of inflation, you’re losing money. Read on to find out more…

Keeping your savings in a bank account may be as safe as your cash can get.

But when you put your cash in the bank, your money isn’t completely risk free. There’s a factor that you have to consider…

I’m talking about inflation, John Stepek warns in MoneyWeek.

The cost of living tends to rise over time. So if you have R1,000 today, in a year’s time it’s going to be worth less than R1,000.

You just won’t be able to buy so much with the same amount of money.

Let’s say prices are rising at 5% a year. 5% of R1,000 is R50.

So in a year’s time, you’ll need R1,050 to buy the same amount of stuff that R1,000 will get you now.

R1,050 is a bigger number than R1,000.

In financial jargon, the ‘nominal’ amount is larger. But ‘in real terms’ (taking inflation into account) you are no wealthier at all.

You need to beat inflation – which means taking risks

The problem we have, is that if we want to have a hope of retiring in comfort, then it’s not enough just to keep up with inflation. We have to beat it soundly.

And looking at financial history over 20-year periods since 1960, one of the best ways to do that is by investing in shares.

Let’s look at some figures from the most recent Barclays Equity Gilt Study, which looks at UK shares.

Assuming you re-invest dividends, there isn’t a single 20-year period since 1960 where you would have made a ‘real’ loss in UK shares.

You can’t say that for deposit accounts (cash), or for government bonds. Even in the worst 20-year period for stocks, R1,000 invested in shares was worth R1,430. For UK government bonds, the figure is R620, and for cash, it’s R960.

As for the best 20-year periods for each asset class: R1,000 invested in UK shares grew into R12,240. (From 1974 – 1994).

R1,000 in gilts grew to R4,870. (1981 – 2001). And over the same period for cash, you’d have ended up with R1,950.

Of course we’re not comparing like-with-like time periods here. There are good and bad times to buy various asset classes.

Plus there are other important types of investments. The Barclays study doesn’t look at property or gold, for example.

However, the fact remains: If you are investing for the long run – for retirement in other words – then the markets, not a savings account, are the place to put your money.

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