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R1 million in 2000 could buy what you’d need R2.5 million for today. Investing is the best way to beat inflation, writes Maya Fisher-French
The average price of a medium-sized home is now R1.2 million, according to the Absa Property Index. Fifteen years ago, it was R227 000. So while we use the word ‘millionaire’ to indicate that someone is wealthy, the reality is that to be a millionaire is no longer an aspiration, it is a necessity for home ownership.
In a column written by a senior manager at Investment Solutions, Hannes Viljoen, this week, he illustrated how the value of R1 million has been eroded over time. He used the story of David Paterson who, in March 2000, became the first winner of the South African game show Who Wants to be a Millionaire?
Viljoen unpacked what R1 million would have meant to Paterson in 2000 compared with someone winning R1 million this year.
Viljoen assumed that Paterson won the prize in January 2000, just over 15 years ago, and did not invest it, but kept it under the mattress.
Taking inflation into account, in terms of what he could buy, his money would only be worth about R414 298 in today’s value.
That means his buying or purchasing power would have more than halved. In order to have the same amount of buying power today, Paterson would have to win R2.5 million.
This was, however, based on the average inflation rate over the past 15 years. Some items, such as food and property, have increased at an even higher rate. Viljoen drew up a table comparing the prices of food items in 2000 with those of today.
If, in 2000, Paterson wanted to buy a lunch consisting of brown bread, some peanut butter and a litre of fresh 2% milk, he would have paid R14.73 at the beginning of 2000. Today, that same lunch would cost him R49.37 – an increase of 335%.
If Paterson had decided to have a braai at his house in January 2000 with a six-pack of beer and a kilogram of beef fillet, it would have cost him R58.58. That same braai would cost him R212.56 today – an increase of 363%.
If we go back to the house comparison, in 2000, Paterson could have bought four medium-sized homes with his winnings – with change to spare.
Today, he could not even buy one medium-sized home, because residential property prices have increased by more than 400%.
What this really illustrates is that no one can afford to leave their money under their mattress, and the only way to ensure a windfall keeps up with inflation is to invest it.
As Viljoen points out, over the same period, the JSE delivered returns well above inflation.
The graphic depicts how the JSE All Share Index performed since the beginning of 2000 to the end of July 2015.
It shows that if Paterson had invested his R1 million in the FTSE/JSE All Share index in January 2000, it would have increased to more than R5.2 million by now.
This return is more than 520%, which more than covers the price increases in Paterson’s packed lunch and family braai.
In fact, it has created real wealth.
According to Viljoen, property funds listed on the JSE also outperformed inflation and, in fact, even outperformed equities.
This means that even if Paterson had invested his money in cash, it would only have increased by 200% over the period and would still not be able to buy him the same things he would have been able to buy in 2000.
This illustrates the fact that cash is not an investment and should only be used for short-term needs.
Viljoen concludes: “In order to get a decent, inflation-beating return and build wealth, an investor would have to take on some risk. And with risk, we are referring to investments in growth assets such as 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 enables you to become an ‘inflation-adjusted millionaire’.”
INFLATION
busting
