If you’re like many Canadians, you may have a fair bit of your money tucked away in savings accounts, term deposits, money market funds and GICs. Investing in conservative products like these can provide you with some peace of mind given that you are likely trying to shelter that money to preserve your capital. But are you really preserving your capital? Just because you’re not losing money doesn’t mean you’re not losing ground.

You may in fact be preserving the face value of your capital but eroding your purchasing power – which is equivalent to being able to buy less in the future with the dollars you’re protecting today. In the same way, if the dollars you saved yesterday or last year or 10 years ago do not earn an interest rate above the prevailing rate of inflation, while you may have the same amount in those accounts, that money doesn’t go nearly as far as it once did.

When you look around at what things cost today, you can see the effects of inflation everywhere. The price of gas at the pumps surged in late April to its highest levels in more than two years, and the price of a barrel of oil went up more than 5%. When the 3% drop in the Canadian dollar is taken into account, this meant that oil prices were up more than 8% in the first four months of this year alone.

What about housing prices? In 1999, the average home price in Canada was $150,000. Fast forward to the spring of this year, and the average home price in Canada was over $400,000, up 6% in year-over-year comparisons. Other items like groceries and clothing are also taking a bigger bite out of your wallet.

These price changes are all good examples of how inflation can erode your purchasing power over time. This loss of buying power impacts how far your savings will go, and consequently, inflation can be as big an investment risk as any market volatility.

Bye-bye buying power
You are not alone. This disconnect between wanting to grow your investments, but not being willing to take on investment risk is not uncommon. As investors, most of us don’t want to lose money and many of us have a propensity to get increasingly conservative as we get older, thinking more about protecting what we have than the potential gains we can make.

And although this mindset is understandable, sitting with the bulk of your investments in “safe” products can actually be quite risky. In today’s environment, because they earn you very little in returns, vehicles like savings accounts, money market funds or term deposits are not by themselves viable options if you are concerned about the erosion of your capital or outliving your money.

Even a five-year GIC, which may look like an attractive investment on the surface, can often actually provide a negative return once you factor in inflation in today’s low interest rate environment. This is not to suggest that these products do not have their place in a properly diversified portfolio, but rather to point out that you can still be eroding capital even as you think you’re preserving it.

What’s an investor to do?
The best way to protect your purchasing power and grow wealth over time is by including a diverse range of assets in a portfolio that includes some exposure to equities, as part of a comprehensive financial plan that takes into consideration your time horizon and risk tolerance. Appropriate asset allocation, combined with the advice and guidance of experienced professionals, are important components of your financial plan. Before making any changes to your plan, be sure to speak to your current planner to take a close look at your personal circumstances and discuss the best strategies for you.  If I can be of assistance, I would be happy to help.

Christina Gilbert
Investors Group Financial Services Inc.
101 – 4400 Chatterton way, Victoria BC V8X 5J2
Phone (250) 727-9191 ext.501
Fax (250) 727-3222
Email Christina

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