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Inflation is the investor’s enemy and expats in Hong Kong looking to save and invest need to be aware of the role inflation can have on their financial health.
The US has seen inflation averaging around 3.4% since the early 1900s. At first glance, 3.4% seems low and entirely manageable in the context of savings and planning for retirement. In actual fact, this seemingly low level of inflation means that prices double every 20 years and total inflation from the beginning of the last century to the present day comes to a whopping 1,900%!
To give a clearer picture of how inflation affects our spending power, imagine yourself back in 1992 with $100 in your hand and remember how much you could buy. Fast forward 20 years to the present day. To purchase the same $100 worth of goods today you will need to have $163 in your pocket.
Will your savings cope with that kind of adjustment in spending power when you reach retirement?
A $1 coffee at your local coffee shop will cost you $1.56 in 15 years time, assuming inflation remains at just 3% per year. If inflation averages 5%, your favourite $1 latte today will be served up at $2.08. The dangers of inflation are clear when looking at examples in these terms.
According to The CIA World Factbook, the global average inflation rate for 2011 was 4.9% with developed countries averaging 3% and the developing nations showing around 6.3% inflation. Morgan Stanley’s The Global Monetary Analyst suggests that the Eurozone can look forward to 2.1% inflation over the next 12 months and Australia is forecast to reach 2.7%. The figures for Asia do not give any reason for expats to ignore inflation when financial planning. China is predicted to see 3.2% inflation for the next year, Hong Kong 4%, Malaysia 3.2% and Thailand 3.3%.
Investments giving a 6% return may seem quite attractive until inflation is factored in. It is vital to remember that if 5% inflation is accounted for on an investment yielding a 6% return, the actual and real return is in fact just 1%. If inflation is outpacing rates available on bank savings, it becomes essential to make investments that can, at the very least, keep up with inflation.
So what can you do to combat inflation?
The investor’s main ally in the battle to get your investments to work for you is compound interest. The earlier you start saving and investing for retirement, the better your money will work. Reinvesting the interest and dividends from your investments has a dramatic effect on the overall capital over the long term, helping savings match or beat inflation.
Expats in Asia are in the fortunate position of being able to access international tax efficient saving and investment opportunities that provide a further boost in the battle against inflation. Since the annual returns on investments are subject to minimal taxation the amount of capital that can be reinvested is significantly higher and the benefits of compounding greatly enhanced. This results in an inflation beating solution to long term investments and retirement planning.
Infinity is a leading provider of savings and investment solutions to expats in Asia. If you would like to find out how we can help you with your financial planning and investments please get in touch today.