Only the wisest and stupidest people never change.  Confucius

They say the only constant in life is change.  This is nowhere more apparent than in the world of investing where things change daily.  How must the average investor cope with this kind of uncertainty?

Any rational thinking investor trying to manage their own money using the over-load of information freely available is likely to go crazy.  This is probably why so many investors who take responsibility for their own finances prefer the perceived safety and control of a money market account.

Unfortunately cash has its own risk.   I am not referring to splitting your investment between several banks to avoid bankruptcy, but rather the inflation risk of holding cash.  Best illustrated using a cashflow analysis:

Investment:                 R 1000 000

Income required:         R     60 000

Interest rate:                7%

Inflation rate:              5%

 

year Investment interest income reinvested
1 1000000 70000 60000 10000
2 1010000 70700 63000 7700
3 1017700 71239 66150 5089
4 1022789 71595 69458 2138
5 1024927 71745 72930 -1186
6 1023741 71662 76577 -4915
7 1018826 71318 80406 -9088
8 1009738 70682 84426 -13744
9 995994 69720 88647 -18928
10 977066 68395 93080 -24685
11 952381 66667 97734 -31067
12 921314 64492 102620 -38128
13 883186 61823 107751 -45928
14 837257 58608 113139 -54531
15 782726 54791 118796 -64005
16 718721 50311 124736 -74425
17 644296 45101 130972 -85872
18 558425 39090 137521 -98431
19 459993 32200 144397 -112198
20 347796 24346 151617 -127271
21 220524 15437 159198 -143761

 

The above cashflow clearly illustrates the erosion of capital in order to provide for an inflation linked income.

The solution is quite simple.  Either reduce the income required or invest more appropriately in some growth assets to generate a higher return.  Make sure you are not saving yourself poor by avoiding risk.
 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746
E. service@synfin.co.za

Saving Oneself Poor
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