Real Estate Investor Magazine South Africa May/June 2015 | Página 30
STRATEGIES
Inflation
Risk
Risk Management In Buy-To-Let
BY KOOS DU TOIT
F
ew investors truly appreciate the devastation
inflation inflicts on the performance of their
investments. Managing this risk – or hedging
against inflation – is crucial to ensure a financially
secure future.
Understanding inflation
The first step in managing inflation risk is to understand
it. Inflation is often understood as the rate at which
prices of goods and services increase, but in reality the
effect of inflation is far more destructive: it erodes the
purchasing power of money.
For example, a few years ago, a loaf of bread cost
R5. Today, a loaf of bread costs more than R10, which
means R5 will now only buy half a loaf of bread. While
it seems that inflation has increased the cost of bread,
the truth is that it is not the loaf of bread that has
become more expensive, it is the value of R5 which has
halved. This means that you need twice the amount of
money today to buy the same loaf of bread you bought
a few years ago.
In financial circles, this is referred to as the ‘time
value of money’ - the very real phenomenon that the
value, or purchasing power, of money halves around
every seven years, depending on the inflation rate. This
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MAY 2015 SA Real Estate Investor
means that in seven years’ time, the value of R5 will be
half of what it is today and will only buy you a quarter
of a loaf of bread.
Understanding the impact
The second step in managing inflation risk is to
understand its devastating impact on your financial
future.
“The effect of inflation is
far more destructive: it
erodes the purchasing
power of money.”
Let’s say that your retirement fund projects that
you will have R22 million by retirement in 40 years’
time. What that R22 million will be worth in 2055 will
depend greatly on the average inflation rate over the
next 40 years. If inflation averages 8% over the next
40 years, a R22 million retirement fund in 2055 will
be equivalent to receiving aro [