The economic recovery following the Covid-19 pandemic, has caused inflation to rise again and although economists argue that it shouldn’t be viewed as a negative indicator, it’s not good news for savers.
“The consequences of inflation for citizens are brutal,” says Luis García Langa, Director of Corredordefondos.com. "Inflation causes a growing loss of purchasing power over time and the cost of living is rising at a rate not seen for many years, so savings will depreciate.”
Considering what can you buy with 1,000 euros today and what you you will be able to buy 20 years from now, highlights how much money can be lost due to inflation. For example, 1,000 euros at 2% inflation would be equivalent to 1,104.08 in 5 years, therefore, people would have 104.08 euros less. In 10 years it would be 1,218.99 euros, so the loss of purchasing power would be 218.99 euros and 20 years it would be 1,485.95; which is 485.95 euros less.
Luis García Langa says rather than leaving their money in the bank, people should consider other options, to prevent savings being eaten up by inflation.
“It depends how much investors are prepared to risk; If the money is needed within 1-2 years it’s better to do nothing or just invest a very small amount, because the returns are zero or negative."
“For longer periods there’s a huge range of options: portfolios of investment funds diversified according to risk; combining fixed income, with alternatives, with long-shorts with equities, with raw materials, and even with funds that invest in real estate, is the most effective solution,” explains Langa. “We always talk about quality investment funds and adapting the risk to the term. Making a highly diversified portfolio looking for 5-6% per year with a term of up to 5 years is very possible; for longer terms, we can overweight equities and look for somewhat higher returns.”