An analysis by Daily Investor showed that the JSE Top 40 beat inflation over the last ten years because of the exchange’s rally over the last few months.
Most investors aim to at least beat inflation with their investment strategies to ensure they do not lose value in the long term.
If an investment’s return matches inflation, an investor will not create wealth in real terms as the purchasing power of the funds would remain constant over time.
Unless the money grows by more than inflation, a user loses value as they cannot buy the same basket of goods over time.
Some people may be happy to see their money grow but forget that inflation is deteriorating the buying power of their money.
Daily Investor tested how a 10-year investment in the JSE Top 40 index performed relative to an investment that matched the month-on-month inflation rate.
Over the past ten years, the average annual inflation rate was 5.6%. It means that, on average, an investor would need to generate a 5.6% return per year to maintain its purchasing power.
The JSE top 40 index, on average, returned 9.95% over the same period delivering an average real return to South African investors of 4.33%.
A R100 investment in the JSE Top 40 index delivered an ending value of R211. The inflation-matching investment delivered an ending value of R168.
The chart below shows how the JSE Top 40 investment performed relative to inflation over the last decade.
The JSE Top 40 was saved by the boom over the last year. Without it, investors may not have enjoyed a significant return over inflation.