Money/money market investments and the lurking inflation monster

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*This content is brought to you by Brenthurst Wealth

By Rocco van Zyl and Ruan Breed*

The S&P 500 index reached a (new) all-time high of around 4,800, towards the end of 2021, before the latest market pullback. While the reasons why the index fell are well documented, many resorted to “panic selling” and cashing in, or those who had been sitting on silver before simply opted to continue to do so. make.

Rocco van Zyl

However, once you take into consideration that there have been a total of 39 market corrections (a decline of 10% or more) for the index since 1950, averaging at least one every two years, that shows you that there have always been, without exception, been opportunities for investors in times of panic and distress. If that weren’t the case, we would never have reached what they call “an all-time high” two or three months ago. Or any new all-time high for that matter. The mere fact that indices such as the S&P500 have reached NEW all-time highs is exact proof that market corrections/pulbacks present the perfect buying opportunity for investors to once again take advantage of the rally back to the top. Because it will happen.

Ironically, it is in times of chaos that opportunity arises, especially for investors with cash. Recently, especially the week of the 14and – 18and In March, the S&P 500 index posted a weekly gain of just over 6%, but the index is still comfortably below its highs. Which means that opportunities will always be there for those who can handle the inherent volatility of stock markets and patiently stick to a long-term plan.

Investors who are currently sitting on cash, especially in the current low interest rate environment, can take advantage of some options:

Option 1) Continue to sit on silver – This is, of course, the most obvious option. In the short term, it protects against market volatility and uncertainty. However, to achieve returns that beat inflation over the long term, cash simply won’t be enough, unfortunately. It is imperative to consider other options and be comfortable taking a little risk.

Option 2) Increase equity exposure: With a relatively strong rand and a recent correction in offshore markets, now may be the time to “buy the dip” and increase exposure to offshore equities. This is the proven way to achieve returns above inflation over the long term, but one must invest according to one’s risk profile and understand the risks of investing and exposure to equities.

Variant 3) Buying property: Apart from some bubbles in South Africa, the property market has been stagnant, at best, for about five years. What was traditionally a very “safe” form of investment has been a thorn in the back of many South Africans, considering the rapid increase in rates and taxes, levies, etc., all before to add other taxes, such as transfers. Duty, capital gains tax (if you’re lucky). Although it is always possible to expand your property portfolio, it is not necessarily as “sliced” as it may have been in South Africa, especially in the years when property was booming. and where we had an economy that was not shrinking. in real terms. Another big disadvantage of investing in real estate is that it is not a very liquid investment.

Race Ruan

Variant 4) Investing in Income Funds: A great alternative for conservative investors who aren’t comfortable with exposure to stock markets, but want better returns than cash and a much more liquid investment than real estate. In Brenthurst we have been using local revenue funds with great success for several years now. Some of the funds we’ve used have consistently produced inflation returns plus 3% to 4% per year, with less volatility and reduced risk, compared to equity funds. This type of fund is a very good alternative for investors who do not want to take too much risk, but who still want to achieve inflation + 3% return.

If investing in the stock market is too risky for you, option 4 will undoubtedly be the most appropriate solution, instead of sitting on cash.

Inflation is lurking and your cash investments will have nowhere to hide:

With inflation in America hitting 40-year highs, the UK hitting 30-year highs, the war in Ukraine lingering and disrupting supply chains and oil prices around the world, you can be sure that inflation will rise in South Africa beyond the current 5.7% for February 2022, as published by Stats SA.

If you think of a basket of normal products that consumers use on a daily basis, such as staple foods, clothing, entertainment, etc., all of these products have two main drivers of their entry price:

  • Fuel: to transport the various products to the required place
  • Electricity: to run production processes to produce the final product/food

The prices of these two elements rose much faster than the other elements of the inflation basket, well above 10%, even before the pandemic and the war broke out. Therefore, you can bet your last dime that real inflation for the normal guy on the street who likes to have a cold beer on the weekends while braying an A-grade steak and commuting in a Toyota Fortuner, will consume certainly products and services with inflation closer to 10% and easily beyond. If you need proof, here it is:

Referring to the graph above, it is obvious that there is a significant difference between the headline inflation of 5.7% and the inflation on the products we actually consume.

It is this mentioned fact that makes it all the more crucial for investors to look for alternative investment options other than cash or money market investments.

Inflation can and will come to your investments harder than before over the next 12-18 months, and there will only be one winner between inflation and cash investments.

Even if you are a risk averse investor, there are options available at the same level of risk as cash/money market investments, with higher returns.

Wealth Brenthurst

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