LETTER: The word no-one wants to say

Graham Barr and Brian Kantor’s article “Busting the Compound Returns Myth” (On My Mind, November 30-December 6) refers.

I hate to sound like a stuck record, having given Esther Mukumbo a wind-up in April last year about it as well, but I’m afraid I have to once again bring up the word that apparently can never be mentioned in financial circles when talking about compound interest and the time value of money, whether invested in a bank or stocks and shares: inflation.

As no doubt one of many hundreds of thousands who were conned in our earlier years by the slick salesmen selling us retirement annuities and the like that would bring us untold wealth in 30 or 40 years’ time, I eventually came to understand the definition of net present value, and the fact that a rand today would be worth far less relatively than one back in, say, 1972.

Barr and Kantor did a great job demystifying the wonders of compound interest, but they unfortunately said nothing about the inflation that is reducing its monetary value at the same time. Taking their example, if the rate of inflation were also 1%, then the two lots of R1,000, the starter stash and the interest 72 years into the future would, in today’s terms, be worth twice R488, or R976 — R24 less than when you started out. Not much of a win to me.

I think the financial world, including journals like the FM, should perhaps try to help us poor souls with this unspoken word? It could really help.

Dave Stephens
Gordon’s Bay

The FM welcomes concise letters from readers. They can be sent to fmmail@fm.co.za