A hedge around a garden might not be the kind of security you would use to keep burglars away, but the mere fact that you have a garden (with a house on it) might be the best hedging you can get against another monster: INFLATION…
We all know inflation is a fancy term used to “justify” unstoppable price increases.
As I read the other day, inflation is “the rate at which prices… increase”, but it is the effect of inflation that is so destructive: like a silk worm chewing away at the leaves of a mulberry tree, it eats away the value of your hard-earned money.
Prices are quick to follow the example of the fuel price when that commodity increases, but not when it turns around.
It is mostly the price of food – the fuel for our bodies – that dictates the rate of inflation, and it is part of the tsunami of events that ripple out, but never shrink back.
The South African economy is a good example – it has been hammered by our high inflation rate over the last year or two, and problems such as Eskom and the wide-spread drought don’t help.
According to a finance feature I recently read, the high inflation rate is a reality that investors simply have to cope with in a developing economy such as that of our country.
Like a monster in the dark, inflation is a slow and silent killer, gradually eroding the value of accumulated savings; even wealth.
A real-life example is the cost of everyday items such as milk. Five or six years ago you could still buy a 2-litre bottle of fresh milk for R10,00. The price of sugar (2,5 kg) was a single digit number (excluding the cents).
Now, in just 5 years, milk sets you back over R20 for a 2-litre bottle; sometimes even R24,00 (depending on where in the country you drink your coffee).
A loaf of bread containing the best qualities of white and brown costs well over R10. I’m not sure whether you can still buy half a loaf of bread, but you probably won’t get enough bread for a bunny chow for half the money – the price it cost 5 or 6 years ago…
Was it the inflation monster that increased the price of milk and bread and fuel and everything else we use every day?
Not really – the cruelty behind it all is the fact that the value of our money has decreased by more than half of what it used to be worth only a couple of years ago. And by this I exclude the exchange rate – we are not talking about the effect of foreign currency or anything similar…
In financial circles this phenomenon is called the time value of money.
It is a very, very real and observable fact that the buying power of money is diminished around every seven years by around 50% – all because of the inflation monster.
Look at it in another way – a 2-litre plastic bottle of milk in seven years from now will probably cost you the best part of a R50 note…
I think it is already impossible to buy anything else than a plastic carrying bag for less than R1.00 anyway…
How does this affect our savings, or should I say what is the effect on the money some people put away into retirement plans and pension funds or paper assets?
With paper assets inflation eats away at it like fish moths would do with your share certificates in a filing cabinet. This is why less than 2.25% of South Africans will be able to retire one day being financially sorted – if you can call R10,000 per month as ‘sorted’.
Forty years from now sounds like a long time, but if your retirement fund projects that you will then have say R25-million when you stop working, the buying power of your R25-million retirement fund then (around 2055) will mostly be the result of the average inflation rate over the next four decades.
It can be illustrated another way: if inflation averages 8.5% over those 40 years, your R25-million retirement won’t even be worth R1 million in today’s money – it will be similar to around R950 000 today. You will be able to buy then what you can buy with about R950 000 today.
Think 8.5% is too high? Well, if you believe the government that it will keep inflation low, say 5%, as in the first example, do you think you would be able to live like you do now because your close to R3.5-million will last much longer?
The average inflation rate will determine what happens to the buying power of money and what your investment return will be worth, so it is of the utmost importance that you do what you can to make sure your investment provides a hedge against it.
The question is how?
Property seems to offer the answer.
If you invest in buy-to-let property, its price growth that might experience a few short-term fluctuations such as interest rate and tax changes, will keep up with inflation.
Property is not a short-term investment.
Inflation is known to boost commodity prices such as gold, silver and oil, but also physical assets like property.
Apart from that the regular rental income from a buy-to-let property (monthly rental) keeps up with inflation as the rental is increased by an amount or percentage stipulated in the contract.
Nowadays 8% seems to be the norm, or it will be at least the same or close to the official inflation rate. This income then is protected against inflation and in 2025 you should still have the same purchasing power as today.
This kind of property (you deliberately go out and look for properties that are good candidates for renting out by making use of my Property Pro Investment Software Program™) protects your money against inflation.
Discover the 16 reasons why I love to invest in real estate and why I bought 49 properties in 94 days with no money.
It is absolute necessary for the year-on-year growth in your accumulated savings to be higher than the inflation rate in order to accumulate wealth.
If your investments grow at a lower rate than inflation, your savings will actually shrink – look at the value of certain world currencies that are lower today than they were a short while ago.
Beating inflation is very important for any investor.
You might have to consequently adjust your portfolio in order to combat inflation, and you’ll need to do so earlier rather than later as it will make a huge difference.
The last year or two the interest rate paid on savings accounts and fixed deposits turned out to be much lower than that of inflation, not to mention the result after taking taxes into account.
Paper assets like fixed deposit returns do not and cannot compensate for inflation – not even food price inflation, let alone average inflation.
Money in any account such as fixed deposits that matures now, will buy less goods and services today than it would have a few years ago when it was initiated.
So in spite of earning returns of around 8% per year, in real life they bring negative returns and actually reduce the value in terms of buying power.
This is why investors should ensure that their actual returns on investments beat inflation.
Gold is usually very popular to combat inflation as it appreciates in value against a currency during inflationary times. Apart from gold and property, commodities and stocks in the consumer goods sector are usually a good hedge against inflation in any portfolio.
Property however is a great investment at any time, providing you buy the right property. It is even better during times of rising inflation.
Things like limited availability of land and the ever increasing population will always lead to a housing demand, therefore it will basically always have the potential of beating inflation easily.
However, it is important to understand the impact of inflation on your loan.
Most property purchases are done by means of a loan, or as we know it in South Africa: a bond.
Investors have to plan their finances to combat inflation.
Many individual investors do not understand the impact of inflation fully.
It is therefore imperative that they equip themselves with the proper knowledge and skills that will help them protect their wealth from more erosion.
The power of knowledge and property investments
Let’s look at a real-life example how to hedge your investment against inflation by using property (If you do it according to the Property Pro Investment Strategy™)
10 years ago I bought a property that cost me R5,760.00 in total. (I made use of a bond and I structured it according to the Property Pro Investment Strategy™.)
My total investment was R5,760.00.
I sold that property late last year and made R448,344.66 profit.
This was a growth rate of 54.57% per year on my investment over a 10-year period. (To see the full case study go to http://blog.hannesdreyer.com/video-case-study/)
Let us compare this to other investments:
Investment amount R5,760.00
|Unit Trust (Allan Gray Equity Fund)
|Satrix Property Index Fund
|FTSE/JSE Africa Top40 Tradeable Index
Click here to learn how to invest according to the Property Pro Investment Strategy™
I hope that you can see why I use property as a hedge against inflation and why I say it is the easiest, quickest and safest way to become financially free.
Discover how you can invest and build a multi-million rand property portfolio for only R34.83 – this is what I am busy doing.