As you may be aware deposit rates have fallen sharply in recent times and are expected to remain low for the foreseeable future. In times such as these, it is worth noting that your savings are being eroded by inflation.
What is inflation?
Inflation is a sustained rise in overall price levels over a period of time.
How does inflation affect investment returns?
Inflation poses a “stealth” threat to investors because it chips away at real savings and investment returns. Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. For example, an investment that returns 2% before inflation in an environment of 3% inflation will actually produce a negative return (−1%) when adjusted for inflation.
The below table demonstrates the impact of inflation of 3% p.a. over a 25 year period. You can see the erosion that may occur by maintaining this investment approach over the long term.
Many investors, like you, opted for CASH in recent years. By investing in cash you take away the risk of volatility and large losses in the short term, but open yourself up to other risks! It can be seen that although cash may feel safe in the short term, over the long-term you can actually lose purchasing power after inflation is taken into account.
This is why cash should be considered an asset but not an investment. Holding cash can be very helpful over the short term or indeed if you are close to retirement.
You need to ask yourself do you want to grow your money instead of leaving it on deposit or in cash at such low rates?
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