Johannesburg - The iconic game show Who Wants To Be A Millionaire aired for the first time in South Africa on a station called MNet, for those who can still remember the day when this was the only pay TV channel, in early 2000. The presenter was the well-known TV personality Jeremy Maggs and contestants participating in the game-show stood the chance of winning R1 million if they were able to correctly answer 15 consecutive multiple choice questions.
Contestants also had the opportunity to use one of 3 life lines: ‘phone a friend’, ‘50:50’ and ‘ask the audience’.
The only winner on the South African show was David Paterson, who answered all 15 questions correctly on March 19, 2000. Interestingly he was also the first winner outside of the United States.
What is interesting is how the impact of the term R1 million has not seemed to dissipate. R1 million is still seen to be an enormous amount of money, which it rightfully is.
But, is R1 million in Dave Paterson’s hands in the year 2000 still R1 million today? Enter the silent killer, Inflation!
If we assume that David won the inaugural prize in January 2000, roughly 15 ½ years ago, and we also assume that he left his winnings under the proverbial mattress, his money would be worth around R414 298 (this is according to CPI index numbers on the website of Stats SA) in today’s terms.
Real life examples
In other words, his buying power or purchasing power would have more than halved. The CPI index however is a broad gauge that measures price increase in a basket of goods over a period of time. But different people have different ‘baskets’ of goods, so how does inflation affect you?
As an example, if you bought lunch consisting of a brown bread, some peanut butter and one litre fresh 2 percent milk you would have paid R14.73 at the beginning of 2000. Fast forward 15 ½ years and your lunch would now cost R49.37 which is an increase of 335 percent.
Add to that some instant coffee, that increased in price by 358 percent over the period, and you would quickly realise that the things are “not what they used to be.”
On the other hand if you decided to have a braai at your house in January 2000 with a 6-pack of South African Lager (classification according to Stats SA) and a 1kg beef fillet, it would have cost you R58.58. If you decided to have the same braai at the end of July 2015, the cost would have increased to R212.56, an increase of a whopping 363 percent.
Luckily consumer goods aren’t the only items that increased in price over the past 15 ½ years. If Paterson decided to invest his money, he could have earned some inflation beating returns, and then some, of his own.
If Paterson invested his full R1 million in the FTSE/JSE All Share index on January 2, 2000, he would have amassed an amount close to R5.2 million (this is the pure return, no fees, no reinvestment of dividends), at the end of July 2015. That is a return over the period of more than 520 percent, enough to cover the price increase of a braai with a six-pack and a 1kg fillet.
Beyond equities
Equities are not the only asset class that outperformed inflation over the past 15 ½ years though.
Property has also outperformed inflation, providing a better return than the ALSI over the past 10 years, with bonds (ALBI) and cash (Stefi) barely beating inflation (this is before any fees are taken into account).
The important point to note here is that cash, over the long-term, is not an ‘investment’. In the short-term it can be used as a safe place to store or park funds until new investment opportunities come to the fore, however over the long term, ‘investing’ your hard earned salary in cash will not bear the necessary fruit to assist you in having a fillet braai in your golden years.
Saving for retirement is hard enough, and having a silent killer like inflation slowly eating into your savings is not only a daunting thought, but a real risk that can affect when and how you retire one day. Remember that in order to grow your retirement pot you would not only need to earn inflation, but earn inflation beating returns through your investments and hopefully inflation plus 4 percent - 6 percent over a long-term horizon.
What is the same old moral of the story? Although inflation is not as certain as death and taxes (deflationary periods certainly do exist), in general we expect inflation to be present in the future. And in order to get a decent, inflation beating return and to build wealth, an investor would have to take on some risk.
And with risk we are referring to investments in growth assets like equities and property. From a young age it is so important to understand the concept of risk and return as well as to appreciate that risk generally reduces as the investment time horizon increases. So if you ‘Want to be a Millionaire’ one day, make sure your investment choice will enable you to become an ‘inflation adjusted millionaire’.
* Hannes Viljoen is senior manager of technical solutions at Investment Solutions.
IOL