Interest rates remained unchanged
A number of factors and results contributed to the Reserve Bank leaving interest rates unchanged. Unemployment rates play a big role in these decisions, as does food prices. We have seen that the inflation on food prices has increased by 11.8% in the last year. House prices have also increased dramatically over the last two years- an increase of 200 basis points. What this means for a consumer is that on a bond of R1000 000, consumers will pay R1 095 per month extra on their instalments. All these led to the decision to keep interest rates unchanged, as well as America leaving their interest rate unchanged at this stage.
Should inflation rates be considered when making investment decisions?
Often inflation and costs can play a bigger role in terms of a negative decision when it comes to investments, than the actual risk of how the money is invested. Consumers tend to forget that an average money market fund gives you 7% interest, while inflation is 6%. When costs and tax are calculated, then investors are often already well below the value of the money in their money market fund and thus they lose money.
Ecsponent addresses factors such as inflation in a client’s investment portfolio
Ecsponent’s accredited financial advisors will explain in detail what the different factors are that should be considered and why certain recommendations are made. We look at costing, your apetite for risk and what you want to achieve through your investment portfolio. We do not focus on advisor commissions and we show clients what the net effect will be. Clients should insist on this and also look at what the tax implications will be.
Fixed term investments contribute to your wealth and prosperity
The precariousness of the rand has a very big impact on the JSE and this is something that one should try and exclude. Therefore , depending on one’s apetite for risk, one should look at listed preference shares which are term driven with a prime linked interest rate or an after tax net effect of 9%. Dividends paid are taxed, but it is less than normal income tax and capital gains tax.
The impact of tax on your portfolio
Should you receive an interest rate of 9% on your investment and inflation is 6%, you are left with 3%. However, up to 1.7% of this can be lost to income tax. This leaves you with a net effect of 1.3%. This is not sustainable and for this reason it is important to understand why certain risks need tob e addressed in your investment portfolio, as well as how this risk will be managed, as opposed to steering away from all risk.