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The Cost of Not Investing

April 21, 2022
Paul Roux
Investments

Why do we invest? Let me give you a clue: Remember Gran telling the story of how she only paid 50c for a KingCone, or how she bought a whole Wimpy meal for a little over R8? Why is everything so expensive these days? The reality is that our money is losing value each and every day. The R100 in your pocket will be worth R99.97tomorrow and R99.94 the day thereafter, and so on for every day into infinity. Wait,What!?

Inflation

Introducing the culprit: Inflation. Inflation is the general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services. Simply put: Inflation diminishes the purchasing power of our money. TheR8 that used to buy gran a farmhouse breakfast is now scarcely enough to buy her a small side plate of fries.

The main measure we use to calculate inflation is the Consumer Price Index, or CPI for short. The CPI is the price of a “basket of goods and services” purchased by the average household in South Africa. There are 412 goods and services in the basket which are classified into 12 broad groups, such as food, beverages, clothing and footwear, health, transport, and education[1]. We track inflation by the percentage change in the value of the basket over time.

Inflation is currently at 6% in South Africa and is forecast to rise even further due to the impact of the Russian-Ukraine conflict. So, our benchmark is a minimum of 6%. If our income does not increase by at least 6%, it means we got demoted. We went backwards. We can’t afford to go backwards. So, what do we do? We invest. We invest because we want to protect, and even increase, the purchasing power of our money.

Protecting our purchasing power

Let’s use a hypothetical R100 and measure its growth over a 10-year time frame. Our benchmark value, given a 6% year-on-year inflation ,equals roughly R180 in other words, R100 today is equivalent to R180 in 10years. Let’s evaluate the options available for the average Joe.

1. Keep money in cash /safe

2. Savings account

3. Invest

Cash / Safe: The average growth rate for cash is 0%. After 10years, our original R100 is still R100. We have lost almost half of our money to inflation.

Savings account: The standard savings account in South Africa offers about 3% interest. Without considering banking fees, which can have a considerable impact on growth, 3% brings us to R134 after 10 years. We have lostR180–R134=R46 over 10 years. We have not saved our money; we have sacrificed it to inflation.

Invest: To keep it simple, let’s look at the most standard investment metric of all, the South African JSE all share index. Over the last 25 years, the index has produced roughly 11.5% year-on-year returns.

JSE All Share Index and the cost of not investing

Astonishing, isn’t it? We have an almost linear upward trend for 25 years straight. Notably, the graph includes two dumps, representing the 2008 global financial crisis and the Covid19 pandemic. But, given enough time, investors can expect around 10-12% yearly growth on their investment.

After growing at 11.5% for 10years, our R100 has blossomed into a beautiful R300. What wizardry is this!?11.5% might seem humble at first glance, but compound growth is a beautiful thing. We have beaten inflation by R300–R180=R120. Not only have we protected our purchasing power, but we have also increased it.Better even, what if we didn’t only invest R100? What if we invested R10 000, or R100 000?

Getting started

The opportunity cost of not investing is a staggering discovery. The stats do not lie. Now that we know the power of compound growth, what are the next steps?

First, we must evaluate our personal financial situation. Remember, everyone’s risk and return profile is different. Of course, it helps to listen to other people’s insights, but you can’t copy-paste someone else’s strategy.  Second, we must create a plan of action to start investing or refine our plan if we are already investing.

In the next article, we will discuss the different investment vehicles that one can invest in and what to expect from each of these asset classes.


[1] https://www.statssa.gov.za