Inflation can eat away at the returns on investments - especially income assets, like bonds or term deposits. For example, if the interest rate return on income assets is a solid 5%, but the purchasing power, or value of money is reducing by 7% because of inflation, then your position is going backwards. Your $100 invested at the start of the year turns into $105 by the end of the year, but a purchase of a good that cost $100 at the start of the year costs $107 at the end of the year.
Growth assets, such as shares and property, can be less affected by inflation. But now, both shares and property are going down in value. Property values are easing, following very strong growth over the last two years.
Add in the decline in value we are seeing in bonds because of rising interest rates, and it makes for a tough investment environment. From time-to-time shares, bonds and property do all go down in value at the same time, but not very often.
What can you do to manage inflation? Until recently, inflation has been under control, and in fact has been too low for many central banks (including the RBNZ which has a 1-3% annual target range for consumer price inflation). A spike like we have seen over the past few quarters can create a lot of uncertainty for both investors and policy makers at the central banks and governments around the world.
The good news is that sticking to your investment plan will be one of the best ways to keep up with inflation.
Seeing your investment drop in value is hard. But if you switch and put your money into cash, you lock in that loss - and inflation can erode the purchasing power of your remaining cash if the return from cash is not exceeding the level of inflation.
We make sure all our diversified ASB investments hold assets that can help cope with higher inflation. They include shares in companies, real estate, gold, and inflation-linked bonds (we recently published a blog about how we've done that).
ASB believes that your long-term returns will always be stronger if you stick to well thought-out, long-term plans. Whatever happens month-to-month, if your long-term goal does not change, generally speaking, neither should your long-term investment plan.
If you're using your KiwiSaver savings as a source of retirement income, leaving your funds invested gives them the opportunity for growth. Our funds are designed with different goals and timeframes, with different potential investment risk and returns.
Choosing the right fund is an important part of achieving your savings goal. Check out our Help me choose tool to see if you're in the right fund for your goal.
Everyone's situation is different. If you'd like to talk about your investment options, or review your plan, we're always here to help. Our qualified financial advisors are happy to have a chat - you can give them a ring on 0800 272 738 and you can book an online appointment here. Be sure to check out some of our recent ASB Investment Podcast episodes, for more useful information to help you make smart decisions about your investments.
Any valuations, projections and forecasts contained in this document are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Different assumptions and estimates could result in materially different results. No representation or warranty is made that any of these valuations, projections or forecasts, or any of the underlying assumptions or estimates, will be met. Past performance is not a reliable indicator of future performance.
Interests in ASB KiwiSaver Scheme and ASB Investment Funds (Schemes) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides Schemes administration and distribution services. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including possible loss of income and principal invested. For more information see the ASB KiwiSaver Scheme and ASB Investment Funds Product Disclosure Statements available from ASB's website and the register of offers of financial products at http://www.business.govt.nz/disclose (search for ASB KiwiSaver Scheme or ASB Investment Funds).