Canadian dollar coins.The Canadian Press
Dear Nancy,
There is a lot of talk about interest rates eventually rising, but I am more worried about inflation. I have enough assets to live off of, so I have my money in bonds and GICs. The interest rate is so low that I am not making any money, but I am not losing any and that is my goal. I know I am losing the buying power of my dollar. Is there some way I can protect that?
Thanks,
Jeremy
Dear Jeremy,
It is very astute of you to recognize that an important component of investing is how inflation affects the buying power of the dollar. As an adviser, my first priority is to preserve your capital. Preserving capital is not just making sure that your one hundred dollars remains one hundred dollars, but that the hundred dollar gizmo that you can buy now will be able to be purchased with enough growth on the original hundred dollars 10 years from now.
People often forget that inflation is the hidden enemy to the buying power of the dollar. We often think only about the bottom line growth. When people put money into money market investments like T-bills, short term notes or GICs, they are protecting their money on the downside, but is the yield they are getting greater than the inflation rate?
When you deduct inflation from the yield you are getting it is called the real rate of return. This is how much you are actually getting on the investment of your dollar.
As an investor you need to be aware of what the inflation rate is and seek a return greater than it is or else resign yourself to the fact that you could be losing some of the buying power of your dollar.
There are inflation-protected bonds and stripped coupons. They pay a rate of return plus whatever inflation is. When you buy these types of fixed income investments, you are investing knowing the real rate of return on your money. Without knowing the real rate of return, you could actually be losing if inflation is high.
Having this knowledge will help to ensure that you are truly making money and not losing the buying power of that money.
Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can send your questions to asknancy@rbc.com as well.