The incredible shrinking dollar
According to AsiaOne:
INFLATION could hit 5 per cent in the first quarter of next year. This would be a 25-year historic high.Trade and Industry Minister Lim Hng Kiang told Parliament on Monday that record oil prices and higher food and transportation costs could take their toll on the Consumer Price Index (CPI).
The last time inflation hit a high level was in July 1991, when it reached 4 per cent. The CPI has been on a steady uptrend this year: It rose 0.5 per cent in the first quarter, 1 per cent in the April-June period and 2.7 per cent in the third quarter. It is expected to rise at least 2.7 per cent for the current quarter.
Inflation and value of money
SIMPLY put, inflation is the increase in prices of goods and services over time, which means it diminishes the purchasing power of today’s dollar in the future.
While $3 buys you a cup of coffee today, you might need $4 in the future. So we end up buying less in the future with the same amount of money.
There are exceptions. Prices of electronic goods such as DVD players can go down over time because of the product cycle and economies of scale.
‘With rising inflation, if you don’t look at your investments carefully and do something about it, you will find that eventually inflation will erode your purchasing power and thus your wealth,‘ said Ms Anne Tay, OCBC Bank’s vice-president of group wealth management.
Mr Leong Sze Hian, the president of the Society of Financial Service Professionals, suggests using the ‘rule of 72′ to work out the number of years it will take for our purchasing power to be halved or prices to double.
This is done by taking 72 and dividing it by the inflation rate. So if annual inflation is 5 per cent, it will take 14.4 years to erode the value of today’s dollar by half.
Risk-averse investors
IT STANDS to reason then that conservative investors who put their money mainly in bank deposits will eventually end up worse off.
Investing at 2 per cent while inflation is running around 4 to 5 per cent will see your wealth steadily eroded.
Financial consultant Dennis Ng said: ‘I believe that people who play safe are actually taking very high risks. If a person puts his money mainly in bank deposits thinking he is being conservative and safe, in the long run, due to inflation, this person’s savings would actually shrink over time and he would become poorer, not richer.’
The reality is that the return from a term deposit is unlikely to keep pace with inflation and the cost of living over the long term, said Mr Gary Harvey, the chief executive of ipac Wealth Management Asia.
Read the full article at AsiaOneNews
- This article clearly note the importances of investing money instead of keeping money in the bank however the writer assume that the crisis is temporary and investment will secure your money. Many financial planners are out to get your money as commission and leave the fund managers all the power and risk taking with your money…depending on how risk adverse you are the more riskier your asset might disappear overnight.
Do not link investment with insurance as it’s an additional premium charge wasted, if you are going for insurance go for whole life and personal accident plans. Investment go without links with insurance, the current trend will be commodity such as silver and gold.
The problem with investment right now on paper assets are that most people have the false sense of security just like the day before the great depression.
During that time, even the cleaners have investment accounts on the hottest stocks as it’s the best and “sure win” bet. However, in October 24, 1929…the Wall Street crashed and the panic selling continued and much of the paper assets were vaporised suddenly!
What is going to happen this time? My advice is to invest in physical assets that can earn you money and sustainability. Learn to cut cost and reduce debts, don’t bet on the government saving your job as there are no 100% guarantee in life.
Treat investment like gambling, only invest extra cash and within limits, if you have lost everything…don’t borrow to invest just to get back your original sum. Earn back your money the hard way and start again if there is still chance. Time will tell if my advice works but I do not invest in paper assets which offer no guarantee that the market will remain available to trade in an energy crisis.
Stay sharp and healthy, exercise and be happy!
