Sunday 5th November, 2006


Inflation calls for long-term savings

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There is a centuries old Chinese proverb that says: Give people a hundred-year lease on a desert and they will turn it into a garden; but give people a one year lease on a garden and they will turn it into a desert.

The crux of the matter is the reality of time, and now that the alarm has sounded for an inflation rate that is too high, individuals need to re-examine the merits of their savings plans. The question is whether time is on their side, or whether in fact they do not have the time to ride out the high inflation factor.

When there is high inflation one expects that returns on investments will be high. However, when there is also excess liquidity, returns may not be as expected.

Such times call for long term savings plans, and a curtailment of short term savings programmes and consumer spending. The simple reason is that the shorter the term of savings, the lower the returns. Conversely, if you put away money for a longer period, you are likely to earn much more.

Since you will not be spending now, you want to know that ten years down the road, your money will have purchasing power. In general, you are looking for a rate of return that is higher than the inflation rate. With an inflation rate of 9.6 per cent, just where do you go for a better rate?

Where to invest

Quite frankly, the stock market has experienced an overall down turn, although some individual stocks held over the long term could actually yield more than ten per cent per annum. Such stocks are the blue chip stocks, which may represent ownership in the leading banks for example. Mutual funds are averaging at best ten per cent.

Vehicles that are yielding an average return above the inflation rate are individual annuity plans. Traditional group or employer sponsored pension plans are not yielding such high rates however.

Real estate has been a sellers market for some time. Now may not be the best time to buy, unless you get a bargain or a fire sale. But in any event, you would need significant sums to begin with. And if you have, you should wait for the market to bottom out, before buying.

Saving in a foreign currency has always been a hedge against inflationary pressures. However, with high liquidity and high GDP, there is another consideration. My guess is that an appreciation of the TT dollar is a possibility.

If that happens, those who convert into a foreign currency in the years preceding, will actually loose. Of course, I want to reiterate, currency appreciation is merely a guess on my part. The various scenarios may leave most of us between a rock and a hard place but the important idea is to keep savings always in perspective!

Basic rule

The first rule of a sensible savings programme is to save first and then spend the rest. With a target in mind, small sums, saved consistently will grow, to furnish the down payments we need in order to provide a home and an education for ourselves and our families.

Yes, we live in different times, but still: haste makes waste!

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