Showing posts with label real rate of return. Show all posts
Showing posts with label real rate of return. Show all posts

Saturday 17 December 2011

No savings account beats inflation


No savings account beats inflation
Savers will struggle to erode the effects of rising inflation as the savings number of products dries up.

A sign warning of inflation
No savings account beats inflation Photo: .Keith Leighton / Alamy
Today's inflation figures show that the Consumer Prices Index (CPI) fell during November from 5pc to 4.8pc.
In order to beat inflation, a basic-rate taxpayer paying 20pc would need to find a savings account paying 6pc per year, while a higher rate taxpayer at 40pc needs to find an account paying at least 8pc.
However, there is not a single savings account on the market that taxpayers can choose to negate the effects of tax and inflation whether it is CPI at 4.8pc or the Retail Prices Index (RPI) at 5.2pc.
The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20pc, would have the spending power of just £9,210 today.
Sylvia Waycot, spokesperson for Moneyfacts.co.uk, said: "Savers continue to lose out to inflation even though the rate fell today. With returns so low and inflation unsteady, people don't know which way to turn."
A growing number of people are falling into an eroding spending-power trap which has already wiped nearly £800 off the spending power of £10,000 in just five years, said Ms Waycot.
"Over the last year the number of savings accounts that beat inflation for basic rate taxpayers has dropped successively from 57 to absolutely none, which must leave savers wondering why they save at all," she said.

Tuesday 2 February 2010

Equities carry the highest risk. Why, then, invest in equities?

You can also make a lot of money investing in equities.

During the long term, US stocks gave a historical compound annual return of 11% to its investors.  During the period January 1960 to December 2000, you could have earned a compound after tax return of 16.9% a year on your shares on the South African stock market.

Equities are one of the few asset classes that give you a real chance to fight inflation over the longer term.

The reason for this lies in the nature of equities.  Equities are investments that give you part-ownership in a company.

Companies issue shares because they need money (or capital) to expand. 
  • When you buy shares, you own part of the company, including its assets. 
  • That explains why, although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases. 

Note that we say a 'good' company
  • Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow. 
  • That is why it is important to be clever when you make equity investments.

Besides your share in a company's capital (i.e. its assets less its liabilities), you can also share in its profits by way of dividend payments to the company's shareholders.  This is another reason why investment in equities provides one of the few opportunities to safeguard the REAL VALUE of your capital.  The term 'real' is very important in investment terminology.  It means that you have taken the impact of inflation into account.

Friday 29 January 2010

Your money's job description and your principal financial goal: "Work to give a real rate of return."

Return is a very important concept in the investment world.  It is simply the difference between the money you start off with and the money you end up with.  In other words, how your money has grown. 

The rate of return is the pace at which you achieve that growth, and is normally expressed as a percentage per year. 

The nominal rate of return does not take inflation into account, while the real rate of return is the nominal rate of return less the inflation rate.

E.g.

Nominal rate of return for FD 4%
Inflation 3%
Real rate of return for FD 1% (4% - 3%)

You should learn how your money can work for you to increase over time and to beat inflation.

Your money should give you a real rate of return.  This should be your money's job description and your principal financial goal.