One only has to visit your local grocer to experience the effect of inflation on your monthly budget. However, one seldom gives thought to the effect this may have on one?s investment and ultimate buying power.

One of the ways of quickly evaluating this risk is by using the 'Rule of 72'. By dividing 72 by a given inflation rate, one can calculate how many years it would take for an amount to halve in value. Using a current approximate CPI figure of eight percent would equate to the halving of a value every nine years (72 ? eight = nine).

Consider the above scenario, with capital of R300 000 and an annual income expectation of around R30 000, the required return to meet just the income is 10 percent. Now assume that if one just achieved this without taking any inflation into account, the capital and income would remain exactly as is in nominal terms (R300 000 and R30 000) but the purchasing power of this same amount would be the equivalent of R150 000 and R15 000 in today?s (real) terms in nine years time.

As one wouldn?t currently be achieving a 10 percent return in cash or a money market fund yet drawing down at that rate, the reality is that capital depletion is inevitable and stands out as the number one risk in the example above. Put simply, unless one was to reduce the drawdown or take on some market risk, the capital will slowly be eaten up.

In conclusion, when deciding where to invest, regardless of whether it is for an income or a specific objective, all the above risks associated with the decision should be carefully evaluated. Beating inflation should be an overarching principle that should determine one?s investment departure point. After that, discovering one?s specific objective should be weighed up against the market risk associated with it. Finally, ensure that one has a sound decision making framework to keep emotions away from rash and potentially wealth depleting actions.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals? personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.