Inflation is said to be an investor's worst enemy – although it's safe to say it's even worse if you're not investing.
In a nutshell, inflation reduces your purchasing power. If the inflation rate is 3%, a coffee that costs $30 today will cost $30.9 next year.
Over time, this can mean your hard earned savings, if not managed properly, will be worth much less than they are today!
Your weapon against inflation
In short, investing is the easiest way to combat inflation and ensure your wealth is protected. We'll show you how big a difference this makes:
Case 1: Putting your cash in a savings account (or under your mattress)
Assume that Flora saves HKD 5,000 each month starting today and carefully puts the money in a savings account (which offers negligible interest, equivalent to having it under the mattress).
Lets also assume that inflation will remain steady at 2.5% (the Hong Kong Government's forecast for the next five years).
30 years from now, Flora who saved HKD 5,000 each month would have accumulated a total of HKD 1.8 million. However, inflation has eroded this by 30.8% leaving her with only HKD 1,245,151 in savings – inflation cost her HKD 554,849!
Case 2：Investing responsibly in a diversified portfolio
In an alternate timeline, Flora understood the importance of investments and put the HKD 5,000 she saved each month into a diversified portfolio returning a modest 4.5% – thanks to the power of compounding, her wealth grows by HKD 1,191,649 – an improvement of 94.7% after inflation!
How to get started investing
The lesson here is that even though a savings account sounds like a 'safe' way to park your cash, you may actually be losing more money by not doing anything with it.
Important information: Investment involves risks. This information is intended to be educational and is not tailored to the investment needs of any specific investor. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. Past performance is no guarantee of future results. The value of investments and the income from them can go down as well as up, so you may not get back what you invest.