How many times have you heard financial people talking about ‘the investment time frame’ and investing for ‘long term’? I bet you never really understood why…
If you have already read the Part 1 of the Hitchhiker’s series to invest – What is investing, you would know that there’s a difference between an investor and a saver. A quick summary; it’s all in the attitude and the practical understanding of what you’re doing as well as having an objective party to guide you.
Going back to basics, the only reason why people invest is that the value of our dollar reduces every year.
Yes that’s right, the value of our dollar drops in line with the rise in the cost of living. Better known as our purchasing power, it’s being eroded by inflation. And I’m talking about the real inflation – the actual increase in the cost of goods and services we buy every week – petrol, milk, health insurance, electricity etc. This rate is much higher than the official inflation rate.
Using 5% real inflationas a guide, this means means that this time next year, the dollar you have in your pocket will only be worth 95c. So, to just keep your purchasing power up, we have to invest our hard earned cash and get at least 5% annual net return (after fees and taxes) on every dollar.
Wait second, this is only the minimum we need just to keep up. Didn’t we want to actually increase our wealth?
This leaves us with no other options than having to invest our savings in ‘growth’ assets. Growth assets, like shares and property are the only assets that are able to sustain after tax returns to improve your purchasing power after inflation.
Now let me ask you a question, when do you think will this erosion of our purchasing power stop? Well, if we take the history as a guide (and it’s the only guide we have) the inflation is not going to stop. Sorry.
In simple terms, this means that our investment time frame isn’t something with a definite start and a definite finish. The decision of being an investor has to come hand in hand with this realisation and acceptance that investing is a never ending process (you invest between now and when the cost of living will stop going up). At least for those of us who want to leave some legacy and preserve our wealth for future generations.
CRASHES, PLUNGES, PLUMMETING
I hear you ask, “But what about the market crash?” First of all, let’s get the terminology right. If something comes crashing down, it will hardly, if ever, go back up or work again. Planes crash, cars crash and trees crash. It’s a sudden and unexpected one-off event.
What happens in the markets is best called a correction. It’s something that happens on a regular basis. The real investors know that markets are cyclical and they expect it. It’s totally normal for this to occur and as an investor, you can actually take advantage of it. Markets go up and down all the time but these corrections are always temporary and the long term trend (of the last 100 years or whatever) is upwards.
We will investigate how to do this in Part 3 of this Hitchhikers series to invest. If you can’t wait for part three, feel free to contact me, Michal Bodi – Click to Contact Michal Bodi