Inflation, your nest egg's silent assassin
By Ma. Salve Duplito
INQUIRER.net
First Posted 21:52:00 06/08/2008
Filed Under: inflation, Personal Finance
MANILA, Philippines--If you are saving up for retirement or your children's education, news that the economy has finally succumbed to higher oil and food prices and concerns about the stock market's lurches may not worry you too much. But inflation at a 9-year high of 9.6 percent announced last week should.
Inflation hits just about anything you need to live--rice, fish and eggs, clothing, gas and commuters' fare, medicine and doctors' fees and most especially tuition. Chances that these things will be cheaper by the time you retire or when the young ones go to school are slim.
The problem, finance people say, is that the value of Filipinos' nest eggs may not grow as fast as prices are rising. Every peso saved loses value over time, especially since Filipinos are generally conservative savers who keep their money in safe and low-earning time deposit accounts.
In May, inflation rose to a 9-year high of 9.6 percent, a number the country hasn't seen since January 1999 when it was still in the throes of the Asian financial crisis. That's higher than the 364-day Treasury bond yield of 6.846 percent or a 7-year fixed rate T-bond at 8.375 percent. Inflation is now higher than dividends most insurance companies are offering on cash-value plans.
"Inflation is [a financial] plan-altering factor, but it is a silent assassin," says Johnny Noe Ravalo, a macrofinancial economist and an INQUIRER.net columnist.
Protecting your portfolio
There is not much people can do about inflation except monitor and re-balance portfolios, Ravalo says. Doing these may still result to a loss, but doing nothing about inflation will guarantee it, he says.
But what is even more harmful than doing nothing is chasing after high returns to beat inflation and looking for deals that are too good to be true. Mon Tejero, head for research and portfolio strategy of Citicorp Financial Services, warns of investment offers that are too good to be true.
"Leaving your money in deposits may keep your cash safe but not your wealth. In order for your money to outlive you, your investment returns must outpace inflation. [But] be wary of scams too--when the returns are too good to be true, it probably is," he says.
Understanding options thoroughly is important because investments react differently to price increases, Tejero says. Equities are traditionally viewed as one of the best hedges to inflation because businesses can pass on rising costs to consumers. That means corporate earnings rise when prices climb, he explains.
He says some equity strategies to consider include investing in emerging markets that have high economic growth rates and in some cases, commodity producers. Energy and mining stocks are also good options as their products rise with inflation, he says.
The same with consumer staple stocks since these companies sell products that people buy even if prices skyrocket. "We'll eat rice whether it's P20 per kilogram or P50 per kilogram," Citibank's Tejero says. Utility and infrastructure stocks like telecommunications and water companies usually belong to regulated industries with pricing contracts that incorporate higher inflation, Tejero adds.
Other options for the inflation-challenged portfolio are real estate, infrastructure assets, commodities such as gold, oil and agriculture--investments that are generally for high-net-worth individuals. These are less liquid investments and may be difficult to sell when one needs cash the most, but may be effective in fighting off inflation, Tejero says. In developed markets such as the US, inflation-linked bonds allow coupons and maturity values to adjust depending on inflation.
Savings vs inflation
Alijeffty Gonzales, an investment professional whose firm ACG Advisors provides financial planning and investment advice, recommends going short-term to take advantage of higher rates and avoiding medium to long-term bonds. He agrees that there are inflation-proof stocks like food and banking stocks as these businesses capture higher prices and interest.
Gonzales, a well-known speaker on financial planning seminars in the insurance industry, is not as worried about inflation for the long-term investor. Augustus J.V. Ferreria, senior executive vice president of Generali Pilipinas, on the other hand says people would be chasing after higher returns instead of focusing on what is more important--increasing their savings.
As proof, Ferreria had a worksheet designed by his technical team to show that increasing savings, more than going after higher interest earnings, makes or breaks a nest egg.
The worksheet, created by Maiko Diaz de Revera of Generali, shows that even a person with P100 million in the bank earning a 6-percent interest while inflation is at 10 percent will lose all of his nest egg on the 14th year if he spends all of his interest income year after year.
Even if he gets higher interest, say 12 percent, he will still lose everything by the 12th year, the worksheet shows.
Saving more of his interest income, on the other hand, can be more effective in protecting his money.
At 6 percent interest, 10 percent inflation and a savings rate of 10 percent, his retirement fund of P100 million is stretched by two more years.
When the savings rate is increased to 40 percent, even a low interest of 6 percent amid 10-percent inflation extends the retirement fund by eight more years.
"It's a common fallacy that by getting higher interest, people can protect their principal. The issue is not the rate of return. It is the amount of money that you save that protects you from inflation," Ferreria said.
All eyes will be on inflation in the coming months and what the Bangko Sentral ng Pilipinas (the Philippine central bank) will do to keep effective interest rates positive. After all, inflation is the silent assassin that could harm your nest egg more than anything else can.
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