Preserving the Value of Money

Inflation is the general rise in the price of goods and services and it erodes the value of money over time. When inflation rises you require more money to buy the same goods that you were able to purchase in the past. It is therefore important to consider preserving the value of money through your investments. This is particularly true for those that must rely on the income derived from the funds invested. The rising inflationary effect on your dollars means your standard of living will decline if your income does not keep pace.

The underlying cause of inflation is usually that there is too much money available to purchase too few goods and services. It may also be that demand in the economy is outpacing supply, causing shortages and resulting in higher prices being charged. Another cause is through the rise in prices of imported goods.

Investing in term deposits and other short-term cash assets will not preserve your money from inflation as the value does not increase. In fact the return is also affected by the rate of inflation. If, for example, you receive a 3% after tax return you must then deduct the rate of inflation to get the real rate of return. If inflation is at 2.5% your actual return is only 0.5%.

The idea is to invest in funds that will grow in value over time. Assets that provide growth are shares and property. Of course, as we are all painfully aware from recent times, there are periods when growth assets experience negative returns. These periods should be viewed in the context of a long-term investment horizon.

While investing in shares is a volatile strategy on its own, spreading your investment in other assets reduces the risks. It is important that diversification is exercised so that you are not subject to the declines in one market — diversification that is based on your particular risk profile and time frame.

Even those that are retired need a component of growth assets in their investments. Naturally this will depend on the amount of money available for investment but as it is possible to live thirty in retirement you will see that there is a need to preserve the value of your money. This is particularly true if you are relying on your assets for your living expenses into the future. The risk becomes one of outliving your money.

Preserving the value of money means accepting that you need to embrace investment in the sorts of assets you’ve most likely been avoiding over the last few years. What you need to remember is to not take fright when markets go down and then withdraw your funds as this is how you lose money.

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