The Daily Insider: Geometric average rate of inflation since 1995 has been 5.7%

Not for the first time, I’m indebted to Rowan Williams-Short, one of SA’s top money managers who for the past decade has been head of fixed interest at Vunani Fund Managers. Rowan recently contributed an excellent piece explaining the serious problems with the interpretation of data on foreign purchases of SA bonds and equities. Click here to read it.

Rowan, a long-time CFA, also set me right on the calculations I shared yesterday on a family member’s return on an annuity purchased in 1995, explaining that it requires a different calculation to the one I applied.

He wrote: “The good news is that your family member has actually done well. With cash flows out (R25k in 1995) and in (R320 a month since then), an IRR calculation is necessary. This shows an annualised return of about 16%, which makes sense since the South African government long bond yield was around 16% in 1995. The geometric (not arithmetic, which can be a poor approximation) average rate of inflation since 1995 has been 5.7%.

“I hope that makes you, or your family member, or both feel a little better. He or she has done far better than inflation.”

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