Newsletter • Quarter 1 • 2023
Portfolio Performance
Saving for retirement is long term
Unless you are over the age of 57, saving for your retirement is a long-term project. In the chart above, the ten-year returns of the Fund are intentionally shown first, as you should be focused on the long term when looking at the investment performance of your retirement savings.
Over the short term, such as the one-year period, investment returns are expected to be much more volatile. Markets can rise and fall, sometimes by large amounts because they are driven by current events, supply and demand factors, and the 'noise' in investment markets. 'Noise' refers to the day-to-day flow of news, both global and local, that affects investment markets for brief periods.
Over the long term (ten years or more) the High Growth Portfolio’s* performance was slightly higher than the performance of the Balanced Index. This outperformance of 0.6% may appear small, but remember that it is per year, over ten years. This all adds up, making a significant difference to your retirement savings.
On the one-year return on the chart above you can see the spike in inflation, compared to the other periods. Rising inflation has been experienced in economies worldwide and has been a key driver of last year's global investment performance.
* With effect from 1 March 2023 this will be renamed the Woolworths Balanced Growth Portfolio.
What is inflation?
Inflation simply refers to the rising prices of goods and services over time and is measured by the change in the price of a specific basket of goods. It is an increase in the cost of living in a country.
The measurement of inflation is calculated monthly by Statistics South Africa, which produces an official inflation index for South Africa.
Over time, the effect of inflation is that it reduces the actual value of money:
- What you can buy with R100 today is less than what you could buy with R100 this time last year, and much less than you could buy in 2018.
- Generally there is an increase in prices. The inflation index, called the Consumer Price Index (CPI), measures this increase over time.
- The Consumer Price Index gives an indication of the average fall in the value, or purchasing power, of money.
What are the effects of inflation?
A low level of inflation reflects a healthy economy. It shows a good level of demand for products and services and naturally results in a balanced increase in prices. Low, stable and predictable inflation is good for the economy and for your finances.
Low inflation helps money to keep its value and makes it easier for everyone to plan how, where and when they can spend. It helps you to plan and budget for your future.
The South African Reserve Bank has a mandate to manage the level of inflation. It does this by adjusting interest rates to remain within a healthy range. In South Africa, the South African Reserve Bank aims to restrict inflation to between 3% and 6% per year.
A high level of inflation puts pressure on the economy and has far-reaching implications. It reduces the spending power of the money you have, which can have a negative impact on your lifestyle.
Inflation has two main causes:
- 1Demand for goods and services is greater than the available supply. This 'demand-pull inflation', is the healthiest cause of inflation in an economy where the population is growing.
- 2Significant increases in the prices to produce goods such as electricity and fuel. This results in an increase in the cost of goods and services regardless of the demand. Known as 'cost-push inflation', this is an unhealthy cause of inflation which usually results in goods and services becoming unaffordable.
Why does inflation matter when saving for your retirement?
Higher inflation over a long period of time can harm your retirement savings because it can erode the purchasing power of the money you have saved.
It is important that the value of your retirement savings grows more than inflation over the long term, so that your money maintains its purchasing power and does not have a negative effect on your lifestyle once you retire.
Example:
If your income is currently R20 000 per month, and there is 3.0% inflation per year, then in 30 years’ time your R20 000 will be worth only R8 000 per month. That is less than half!
If there is 5.0% inflation per year, then in 30 years’ time your R20 000 will be worth a mere R4 600 per month. That is less than quarter!