In my previous article, we saw how inflation decreased the value of money over the years. Now, let’s look at some of the options we have to protect the value of our hard-earned money.
In this article, I’ll look at equity investments as a way to protect your money against inflation.
One of the best ways to protect against inflation is by investing in equities. This can be done by either buying individual stocks or investing in an ETF. Let’s look at the returns of the SPDR STI ETF (SGX: ES3) over the past 10 years to see if it would be a viable option to fight inflation. This ETF serves as a proxy to the Straits Times Index (SGX: ^STI), which is made up of the 30 biggest listed companies in Singapore.
If we look at the annualised returns of STI ETF for the past 10 years, the returns were an annualized 6.59% (if all the dividends were reinvested). Looking even longer term from the date of inception of the ETF (11 April 2002), the annualised returns would have been 7.21% (with dividends reinvested). What this means is that S$10,000 invested on 11 April 2002 would be have become S$17,847 as at 30 August 2019.
Additionally, the STI ETF’s return above easily beats inflation and would more then comfortably cover the 3.2% return you would need if 50% of your savings were invested.
In fact, if you look at the dividend yield of the ETF today, it stands at 3.7%. This means that the dividend alone would easily protect the value of your money over the years and any capital gains would be additional gains on top of that.
In summary, it looks like if investors want to protect the value of the money from the negative forces of inflation, they need to find a suitable investment option.
From the three options discussed above, it looks like the only way an individual can easily beat the forces of inflation is by investing in equities. Stay tuned for the next article in this series which will give you two more options.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Esjay does not own any shares in STI ETF.