Inflation is a greater risk than volatility for a long-term investment portfolio

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[ADVISOR VIEW] HennieFourie of PSGPretoriaOos shares some guidelines to keep in mind to address inflation and make sure this ‘monster’ does not catch you off guard. Investing PersonalFinance

Today, a Wimpy meal consisting of a burger, chips and a cool drink costs about R77. In 1972 such a meal cost about 47 cents. Today, a loaf of brown bread costs about R16. In 1985 it cost R1, leaping to R5 in 2005.

A vehicle that costs R250 000 today, will cost R435 000 in 10 years’ time and R1 000 000 in 25 years’ time . Put differently, after 25 years, today’s fixed monthly retirement income of R15 000 per month will decline to about R3 500 per month in real terms , at an assumed inflation rate of 6%. If we assume an inflation rate of 9%, we are looking at a decline in real terms to R1 740 per month after 25 years.Every person’s personal inflation rate is different, depending on what their inflation basket contains.

The graph below highlights that volatility as a risk decreases significantly over time. Here we can see that for any rolling 10-year period , the JSE has never underperformed inflation.Inflation, on the other hand, is a risk that increases over time. In ‘Finance 101’ you will never be taught that a fluctuating asset class such as shares is less risky than a conservative money market investment.

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