Maintaining and enhancing your purchasing power
Amid all the uncertainty surrounding China’s slowing economy, devaluation and the effects it has had on financial markets worldwide, we often forget a major reason why we invest in growth assets in the first place.
We are all aware that the cost of our groceries in 1990 was far lower than it is now and therefore we need to be compensated by having a higher income and an increase in asset value. To keep up with our living standards, our assets must be able to provide us with adequate returns to protect us from the eroding effects of inflation.
With rates at an all-time low, those who believe that interest rates will not be rising anytime soon will agree that cash in the bank for long periods of time does not make for a great investment when compared with inflationary pressures. This is why we never see cash as an investment other than a temporary parking spot to better protect capital while we wait for lower valuations and better opportunities to arise.
It is easy to be influenced by all the economic and political noise. So to put things into perspective, we have illustrated this with a period unlike any other – the 20 years following the “Great Depression” of the 1930s – to show you that companies (represented by shares) have the ability to enable investors to keep up with inflation and to maintain and enhance their purchasing power.
| invested in 1934 | 1934 | 1954 |
| Inflation | $100 | $204 |
| Cash deposit | $100 | $115 |
| Long term bonds | $100 | $162 |
| Shares/Companies | $100 | $252 |
If you were to put all of your money into long term Government bonds in 1934, you were also unlikely to do very well into the future considering that bond yields were at historical low levels. After all, bonds are fixed income in nature and therefore the capital appreciation on these instruments are not infinite. To fix your income at below 3% p.a. for such a long time at rates below that of inflation will not have helped your long term cause.
Inflation alone during this tough economic period still doubled, equivalent to a rise of approximately 3.5% pa.
Strong companies on the other hand, had the ability to increase the price of their goods and services over time through the effects of inflation and product/service improvements. The key is to invest in companies with a competitive advantage and purchased at a reasonable valuation. Over time this should maintain, or better still, increase your purchasing power.
With the world so connected now, we encourage all our clients to also look beyond our borders when investing. While we have some very strong companies here in Australia, the majority of opportunities that possess true competitive advantage are often listed abroad. To only look at domestic companies, you are sidelining almost 98% of the opportunities that may exist.
While we have had some buying activities over the course of the recent market correction, we remain somewhat cautious because of the valuation headwinds ahead. As always, be selective about the industries and companies you buy into. By investing in industries and companies with strong economics and a competitive advantage, purchased at reasonable prices, you can further increase your chance of enhancing future returns and thus fight off the drowning effect of inflation. After you place your conviction in these types of companies (represented by buying shares directly or by investing alongside a high quality fund manager), the hardest job after that is to sit still.
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice.
Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407