Inflation — the quiet destroyer of capital

Investors often measure success against market indices, peer groups or recent winners. These comparisons have their place. But for most people, the real benchmark is simpler: do their investments grow faster than the cost of living? LINDA EEDES writes that for long-term investors, protecting purchasing power is not a side issue; it is the point.

Dave Foord has described inflation as ‘the biggest destroyer of capital’. It is the gradual erosion of what money can buy. It usually works quietly and rarely feels dramatic. A grocery bill rises, medical aid costs more, electricity tariffs increase and insurance premiums edge higher. Over time, the damage compounds. At 5% inflation, the purchasing power of money roughly halves every 15 years. For a person retiring at 65, this matters enormously. A retirement that lasts 25 or 30 years is not unusual. Over that period, a nest egg that looks safe at the start can become dangerously inadequate.

This is why headline returns can be misleading. If a portfolio earns 6% in a year when inflation is 7%, the statement may show a gain, but the investor has gone backwards in real terms. There are more rands, but those rands buy less. Inflation is therefore not just an economic statistic. It is one of the most important risks in long-term investing.

That risk is quietly rising. Oil prices have eased from their recent spike, but investors should be careful about assuming that the inflation problem is over. Several forces that helped keep inflation low for decades are now weakening. Global supply chains are being redesigned for resilience rather than pure efficiency. Tariffs are raising costs in parts of the trading system. Geopolitical tension can quickly disrupt energy, food and transport markets. These pressures may not push inflation up in a straight line, but they make a return to the low-inflation world of the 2010s less certain.

This matters especially when markets are enthusiastic about narrow investment themes and the risk of permanent capital loss is high. Artificial intelligence may be one of the defining technologies of the next decade — but even powerful themes can become dangerous when investors are willing to pay almost any price to participate, as we note elsewhere in this newsletter. If expectations disappoint, capital losses can be severe. 

Foord’s approach starts with a simple question: will this asset preserve or grow purchasing power after inflation? Different assets answer that question in different ways.

The first line of defence is equities with pricing power. A share is ownership in a real business. The best businesses can pass rising costs on to customers without destroying demand. They often have strong brands, essential products, high barriers to entry or dominant market positions. Over time, their revenues, earnings and dividends can rise with inflation. However, valuation still matters. A high-quality business is not a good investment at any price.

The second tool is inflation-linked bonds. Unlike conventional bonds, their capital value adjusts with inflation. They are not bought for explosive returns, but for purchasing-power protection. If inflation stays low, investors may not need that protection. If inflation surprises to the upside, it can be very valuable.

The third area is real assets. Gold, infrastructure and selected utilities can play useful roles. Gold produces no income, so it must be sized carefully. But it can help when investors worry about inflation, currency debasement or geopolitical stress. Infrastructure and utilities can also help where revenues are regulated or contractually linked to inflation.

There are four practical lessons. Do not chase a fashionable theme without asking what is already priced in. Do not hold too much cash at low or negative real returns. Do not assume all bonds are safe when inflation is the source of the stress. And, most importantly, focus on real returns. A portfolio succeeds only if it improves what money can buy.