Cost of living pressures are hurting everyone’s hip pockets these days. From groceries and petrol to loan repayments, the increasing costs have most Australians struggling week to week to make ends meet. Here’s how you can alleviate the pain by protecting your assets against inflation, from Tyson Matthews, Green Associates’ Financial Adviser with over a decade of experience.
Key takeaways
- It might feel more comfortable to hold more cash, but inflation negatively impacts cash the most.
- Taking on some risk through investing in shares and property can not only preserve your wealth by protecting your assets against inflation — but also grow it.
- Alternate strategies like annuities are also worth considering.
- With proven experience in helping clients in Canberra, Goulburn, Brisbane and beyond protect their assets, we’re well-placed to help you too. Book an appointment to meet with a Green Associates’ Financial Adviser today.
How inflation affects your assets
Inflation is the general increase in prices and fall in the purchasing power of money over time.
Inflation affects cash most directly, including both the cash you physically hold and the money in your bank accounts. Inflation erodes its purchasing power, which essentially means that your money buys less than it did before.
This negative effect of inflation on bank accounts and term deposits can be exacerbated when banks offer interest rates at less than the current rate of inflation — which is happening right now.
If you have bonds, inflation can cause their prices to fall.
If you have shares, the impacts are mixed and depend on how resilient the companies and industries are. Currently, as higher inflation has led to higher interest rates, many companies have seen the present value of their future earnings fall — and consequently, their stock prices have fallen as well.
It’s not surprising then that many investors are concerned that their investments are not keeping up with inflation, which currently stands at 5.8% — and as a result, they might not be able to retire.
How investing in shares and property can protect against inflation
Real tangible assets like property can serve as protection against inflation as their value tends to rise with inflation.
That being said, investing in shares can also help protect your assets, so one strategy is to adopt a balanced investment approach — to not only preserve but even grow your wealth.
Let’s assume you have $10,000 in a high interest savings account earning 2.20% (which is what most banks like CBA offer after a honeymoon rate for a few months). You will earn $220 in interest for the year — but inflation would reduce the value of your investment by $580 over that period. The net loss in this scenario is $362 for the year.
Now if you were to invest that same $10,000 into a balanced investment fund (approximately 70% in shares and property) within your superannuation fund or a personally held investment, the average return for the 2022/23 financial year was 9.20% — according to SuperGuide, Australia’s leading superannuation and retirement planning website. This would give you a return after fees (which average 1%) of 8.20% which will be $820. Inflation will still be $580 but now you make a net profit of $240.
These returns might not seem like much based on $10,000, but as you scale up the amount of money you have to invest and multiply the returns over the years, the results are significant. Without refining your investment strategy, you could potentially be missing out on hundreds of thousands of dollars.
How to hedge against inflation with annuities and mortgage payment strategies
For those who do not want the risk of being invested in shares and property, there are alternate strategies like annuities and mortgage strategies.
Annuities can help protect your assets against inflation when its fixed payments are indexed to inflation; this means its value will rise and fall in line with inflation to protect purchasing power.
Another alternative is to put excess income into your offset or directly against your mortgage, in order to make savings on interest that may offset what is eroded by inflation. This works because most mortgages are about 5.5%-6%, which is in line with inflation.
While interest rates are expected to have peaked, it may take several quarters for inflation to moderate and so it remains vital to implement strategies to reduce the sting of inflation and protect your assets.
If you would like to know about these strategies or other alternatives that are suited to your individual needs, make an appointment to meet with a Green Associates’ Financial Adviser today.