One way the wealthy inflation-proof their investments

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Chances are that Sh100 today will get you more items at your neighbourhood shop today than it will next year.

It will get worse with time, in that a few years down the line, the Sh100 note will get you even fewer items. If anything, it might get to a point where it will be tossed around like is the case with coins today, with its value considerably reduced.

This is due to inflation, which is the increase in the average price of goods and services in the country over a given period of time, usually a year. It measures how the cost of living changes over time.

Ken Gichinga, an economist with Mentoria Economics, says that from the onset, one should consider options that give them a return that is higher than the inflation rates.

In June, inflation stood at 6.3 per cent, having been on the rise steadily. This is at a time when nearly everyone is reeling from the impact of the coronavirus pandemic, which has seen earnings drop or stagnate, meaning that they are not keeping up with the rising cost of living.

This is to mean that you need to take your money where the returns equal inflation (for saving) or are higher than the inflation rate for investments.

“To shield yourself from that inflation, you want to invest in anything that gives you a return of above six per cent,” said Gichinga.

He added that one of the ways rich people are able to shield themselves from inflation including looking into areas that have high returns.

They might afford to have a higher risk appetite and go after innovative ventures that have not been tested and in turn give them higher returns. But he also noted that they have tools that can enable them take risk in a calculated and in turn, in many instances, they tend to get better returns

“The wealthy tend to look for returns that are above inflation and sometimes some asset classes offer you higher returns but it comes with associated higher risk,” he said.

When investing or saving, it is critical to differentiate between nominal and real return. Gichinga noted that if you invest in an area that gives you a five per cent return (which is the nominal return) with the inflation, for instance, at current levels of 6.3 per cent, it would meant that your real return would negative 1.3 per cent.

“The latest inflation is at 6.3 per cent and with such an investment, inflation leaves you worse off because inflation eats into it. If the nominal return is five per cent, and inflation is six per cent, it means that you have real return of negative one per cent.”

He also notes that well-off people in any society tend to consume a lot of information, which more than anything else gives them an edge over everybody else.

“For example the M-Akiba bond, the mobile-based infrastructure bond. It was giving a return of 10 per cent per annum. Other than paying well above inflation, this was a low risk investment as the government will always pay its debts.

“While it was targeted at retail investors, including low income earners, few ordinary Kenyans bought into the bond, which was due to information asymmetry as well as disinterest. While one could invest as little as Sh3 000. The reality is that most of the people who took it up are wealthy people,” he says. 

He adds: “To be able to shield your money from inflation needs a mind that is switched on…. It is not just a matter of how much you have but your behaviour in learning more about the economy. That curiosity can give you good returns.”

Dollar accounts

Johnson Nderi of ABC Capital says while there are methods of hedging against inflation that include property, investments in high-return areas such as long-term government bonds and savings in foreign currency such as the dollar are just as good.

“While saving in dollar accounts has a relatively lower return than Kenya shilling accounts, the inflation is also relatively low.”

He however cautions that at some point, inflation will always eat into your savings or investments.

“Each asset class has its pros and cons and you cannot completely run away from inflation. But you can reduce the effect,” he says.

“Ultimately when it comes to investments, you need to have an understanding of where you are putting your money… get as much information as possible.”

Where affluent Kenyans channeled their money when the pandemic set in

1.   Foreign currencies. Many moved their monies to dollar accounts to protect it from depreciation of the local currency. CBK data shows that foreign currency deposits dramatically rose by a fifth to Sh756 billion in January from the pre-pandemic levels of Sh626 billion.

2.   Fixed deposit accounts. Cash in fixed deposits rose by nine per cent to Sh1.53 trillion between February and December last year. This amount would reduce as the economy began to recover. 

3.   Government securities. These include treasury bonds and long-term government paper.

4.   Gold has always been a safe bet for the wealthy when an economy is in crisis in times of an economic crisis for the wealthy. But this fizzled out in the fourth quarter with the gold ETF recording an ETF turnover value of Sh10.88 million. This was a decline of 88.9 per cent from Sh98.27 million recorded in the previous quarter.