Another way to compare portfolios is by assessing the odds of beating inflation and by how much. If inflation is 2.1% and your GICs are paying 1.75% interest, you have a problem. Your money is losing its value faster than it’s making money and that’s before tax; after taxes, you’ll be left with even less.
If you make $600 and inflation is $300, you’re still ahead. If your investment makes only $300, you have only matched inflation, not beat it.
To see what your theoretical chance of beating inflation is, use the chart below and assume inflation is 2.1%. Target returns are higher when portfolios hold more equities. The assumption is that equity growth is protection from inflation.
|Fixed Income (%)||60||40||40||25|
|Gross Target Return||Inflation + 4.25%||Inflation + 4.79%||Inflation + 5.50%||Inflation + 5.90%|
Suggested asset mix based on research conducted by iA Investment Counsel Inc.
Did you notice that target returns are higher when investors allocate more money to equities? The assumption is that equities are a good inflation hedge. With a long-term target return of 3 to 4% over inflation (total return of 5 to 6%), balanced investors could assume they have better odds of beating inflation than their more conservative friends.
Use the "inflation plus" rule of thumb to explore:
When developing a plan for sustainable income, it pays to be conservative in your assumptions. The range of the Bank of Canada’s inflation target is 1-3%, using 3% is a more conservative assumption for the rate of inflation.