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Hewison Private Wealth - Insights
Hewison Insights

The relationship between inflation and capital growth.

Pierce Hanlen
Partner & Wealth Adviser
16 Oct 2023

It feels like every news broadcast in the past 18 months has at some point referred to inflation, and for good reason. The (usually) steady rise in the price of goods and services over time can erode the purchasing power of your money, making it essential to consider strategies that not only protect your wealth but also allow it to grow. Capital growth is a key component in this equation.

Inflation is an economic phenomenon that gradually decreases the real value of money. In other words, what you can buy with $100 today may cost more in the future due to inflation. This is a major concern for long-term investors as it can erode the purchasing power of their savings and investments.

To limit the impact of long-term inflation, we need long-term capital growth, which refers to the increase in the value of your assets or investments over time.

If long-term inflation is 2.5%, then achieving a capital growth rate of 2.5% maintains the purchasing power of your assets. Achieving a higher rate of capital growth increases the purchasing power, and a lower rate of growth reduces the impact of inflation but doesn’t completely offset it.

Achieving capital growth also allows you to increase the level of diversification within your portfolio over time. As your investments grow, you can reallocate some of the gains to new investments to help generate income streams from a wider range of assets. This could help reduce your overall risk and volatility, leading to smoother long-term returns.

Capital growth can be achieved by gaining an exposure to investments that can appreciate in value, such as shares and property. Something to be aware of is the volatility that can come with these kinds of investments. While history tells us that most of the time, shares and property will increase in value, there are also periods where they can reduce in value, and sometimes substantially. This makes it integral that you have a long investment time frame of at least five years when investing in growth assets so that you can ride through patches of volatility.

At Hewison Private Wealth we specialise in designing portfolios that provide the right level of exposure to different types of investments to help achieve your own specific goals – and of course assist in offsetting long-term inflation.