The adverse effects of inflation on investment returns become especially pronounced over the long run. Your money today will likely buy less tomorrow. In 1913, a carton of milk cost 9 cents US a litre. By 1963, 9 cents would buy a small glass and by 2013 only 6 tablespoons. Comparing the returns of different asset classes before and after inflation is helpful in understanding why it is important to consider inflation when making long-term investment decisions.

The figures below show total rates of returns in NZ dollars from 1998 to 2017 (20 years) taking into account the impact of inflation. The average NZ Consumer price index for the period was 2.00%:

Return Inflation Adjusted
S&P NZX 50 Index-NZ shares 8.20% 6.20%
NZX NZ 90 day Bank Bill-cash 5.00% 3.00%
International shares (hedged to NZD) 5.50% 3.50%
FTSE World Govt. Bonds Index (hedged to NZD) 6.20% 4.20%

These figures show total rates of returns in NZ dollars for the last five years 2013 – 2017 taking into account inflation during this period of 1.10%

Return Inflation Adjusted
S&P NZX 50 Index 15.6% 14.5%
NZX NZ 90 day Bank Bill 2.80% 1.70%
International shares (hedged to NZD) 15.60% 14.50%
FTSE World Govt. Bonds Index (hedged to NZD) 3.60% 2.50%

Since 2006, inflation rates have been lower than 2%; from 1988 to 2006 they ranged from 2.00% – 3.00% and 1970 to 1982 from 4%- 6%.

In general, a dollar doesn’t buy as much today as it did 20 years ago. This is due to increases in prices, otherwise known as inflation. A key goal of investing is to keep pace with price increases so the money you save will at least buy as much in the future as it does today. It is important to consider inflation and also tax when looking at the return on different asset classes over the long term in order to sustain the lifestyle you want.

Currently, cash in the bank barely keeps pace with inflation and tax. Some diversification to other asset classes can help improve overall returns after inflation and tax and still manage volatility and risk.

This information is general. A Disclosure Statement is available on request.