Cash feels safe, but inflation could be costing you

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JIMMY MOYAHA: When we think about economic data, this little number that always comes out that we often take for granted, but has some serious impacts on everything from our fuel prices through to our investment decisions, and that is, of course, the inflation print.

We’re going to be taking a look at the impact that inflation tends to have on investment decisions in a bit more detail with the head of financial education at Old Mutual, John Manyike. He joins me on the line now to see what we make of this. John, lovely having you on the show, as always. Thanks so much for taking the time.

We often have conversations about inflation and how it has the potential to reduce some of the investment decisions that we make or impact the investment decisions that we make as consumers – but as consumers, what should we actually be understanding around how it is that we protect the real value of our money?

JOHN MANYIKE: Thanks for having me on your show, Jimmy.

I think when it comes to inflation, a lot of people are suffering from inflation illusion. We don’t understand this concept of inflation. The reason I say this is, when it comes to investing, the trick really here is you need to ensure that when you invest, you invest in assets that have the ability to beat inflation.

Because if you’re an investor and inflation doesn’t bother you, then you’ve got problems because your money is not going to grow.

So unless you can grow your investments at least in line with inflation, you will face a declining value of your investment.

So let’s take maybe one of the recent numbers we’ve seen in the Old Mutual Savings and Investment Monitor earlier this year, which indicates that 61% of working South Africans have unbanked cash.

The problem with that is, [and] I’m more concerned about the growing number of people who are keeping unbanked cash because I don’t think we understand what it means from an investment point of view, because inflation is your enemy.

So it’s important to speak to your financial advisor and to play this game of investing, if I may call it that, in a way that you ensure that you invest in growth assets that can deliver that inflation bit in return over a longer term.

I think this is also where we’re missing it because we are trying to cash out, we’re trying to invest and then get money quickly. But that’s sounds more like gambling. You need to take a long-term view.

JIMMY MOYAHA: But John, when times are tough and we do find a bit of a squeeze, whether as a result of the inflation print, whether it’s as a result of interest rates going up, when consumers do feel financial pressure, more often than not, we sit back and say, perhaps I can skip out on saving here and there.

Perhaps I can reduce the savings. How do we start to make better financial decisions around keeping to our long-term goals, despite the short-term fluctuations and the short-term impacts of things like inflation?

JOHN MANYIKE: Yeah, I think we need to understand that when it comes to investing, time is your best friend. It’s all about the time that your investment spends in the market, not about timing the market. The problem with people who time the market, it is the quickest way to lose money.

If we look at the frequency of negative equity returns over different time periods, from the data that we’ve looked at, as Old Mutual, you’ve got a 45% chance of losing your money if you want to invest your money and try and cash in in a day. But that number declines over time.

When you get to say month one, say you’ve got R2 million to invest, as an example, and you want to cash in within a month, you’ve got a 38% chance of losing your money.

When you do that, within a quarter, it goes down to 31%. It goes to 20% when you look at the year. But the minute you get to year five, that number drops to 6%. On the third year that number drops to 6%.

But when you get to year five, what we’ve picked up, especially when it comes to equities, the chances of losing money become slim.

Again, I must emphasise that what I’m saying is not financial advice. You still need to speak to your financial advisor. I’m merely just citing the numbers that we’re seeing, the trend over time that when you start investing, once your investment gets to year five, the prospects of losing money, particularly in equities, becomes smaller.

So that tells you something about time being your best friend when it comes to investing.

JIMMY MOYAHA: Thanks, John, for that reminder. Yes, folks, this conversation is not investment advice, but you can reach out to the team at Old Mutual if that is what you are looking for.

John, I want to take a look at the other aspects of building long term resilience. You’ve touched on the fact that time is your greatest friend in the market, but I want to take a look at other factors like portfolio diversification and mixing up your assets in terms of identifying the right kinds of growth assets.

How important is it to factor all of these elements in, and not just one or two factors in isolation?

JOHN MANYIKE: Very, very important because I’m sure we’ve had this line that don’t put all your eggs in one basket. The reason behind that is that you do need growth assets like equities to grow your investment.

But when you look at some of the top performing asset classes each year, and the best way to reduce your volatility and to manage the risk is to diversify, because in some instances, in some years, one asset class might underperform while the other performs beyond your expectation.

This is really about the balancing act and minimising the risk. That’s why you will always be encouraged to diversify.

But having said that, when you look at the asset class returns in rand terms, when we look at the different asset classes, you would see that the global equities have been showing a yield of around 14.9%, followed by SA equity and then SA bonds at 9.5%.

Those who invest in cash, you’re looking at possible return of about 6.8%. So I’m citing these numbers because it simply shows that the rate of return is not the same.

I’m sure we’re quite familiar with this cliché – the higher the risk, the higher the returns and the lower the risk, the lower the return.

So it’s something you need to speak to your financial advisor about because they also need to profile your appetite for risk. Your age is also a factor, because I guess for most people who become older, they want to take less risks because time is no longer on their side. But these are the kinds of conversations you need to be having with your advisor.

But having said that, if you look at the value of money in the bank and for those who say, I’ll just keep my money in the bank, my money stays there.

Well, on the one side of the coin, one could argue quite convincingly that a bank deposit would expose you to a minimal risk because it’s a bank account. You’re putting money in the savings account.

But from an investment point of view, that’s certainly not an instrument where you would want to be keeping your money for long.

If you want to keep your money there while you’re still making up your mind, it’s perfect. But cash in the bank is considered low risk or advisable for short-term capital protection.

It does not increase your real rate of return. It does not really improve your inflation-beating capability over time. That’s why you need to be speaking to your financial advisor who understands the world of investment and who will then show you how they can create growth for you.

JIMMY MOYAHA: There are always factors to consider when looking at your long-term investment strategy, and that is why you need to sit down and plan this out carefully. Because things like inflation can have a bearing on how it is that you execute on that strategy.

We’re going to have to leave this conversation on that note. Head of financial education at Old Mutual, John Manyike, joining us to take a look at the impact that inflation can have on long term investments.

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