Are You Really Protecting Your Purchasing Power?
You need 7.9% a year not to lose money
For several decades, developed countries have been playing a game in which investment decisions and valuations were made in nominal terms. Inflation was presumed to be negligible and could be eliminated from the analysis.
Official inflation was targeted at 2%. This meant that investors preferred to disregard it without taking into account that over 10 years, this 2% annualized inflation became +20% of purchasing power loss.
Since 1990 the fall has been continuous but steady. But that does not mean that $1 in 2020 will be equivalent to $2.28 in 1987.
This change has not been so radical in the US, but in the EU with the change of the currency of each country to the Euro. Most of them lost more than 20-30% of their purchasing power with this change in just a couple of years.
Time is the most valuable asset you own
✖️ Not the money you earn is.
✖️ Your stock market shares are not.
✖️ Neither are your bitcoins.
✖️ Nor are your digital assets.
✖️ Not even your 7 real estate holdings.
While money is unlimited, as all central banks have made us see, time is not.
We live like rats inside this monetary system where:
Official Inflation gives the illusion that inflation is one single universal number. It is not.
Official Inflation is conveniently manipulated with a strong bias toward underestimation.
The Loss of Purchase Power is at least twice Official Inflation (in our view).
As money buys time. Therefore, what central banks are doing is our most valuable asset.
This leads us to two conclusions:
Holding cash is not an option. If the inflation rate we have today were to continue, we would be facing a scenario very similar to that of 1960 (previous photo).
We need to invest in assets that generate returns greater than or equal to inflation.
It is no longer useful to invest in a 60/40 portfolio as we have done all our lives. Bonds have lost their value, as have governments.
It may not make sense to invest in stocks, either. The historical average of the S&P 500 has been 7%, and today inflation is around 8% in the US. Inflation at 49-year highs.
Nor does the 4% rule make sense. If you take out 4% of your savings per year and invest the rest in equities, you will never need to go back to work.
A more fragile world
Globalization has made us live in a much more fragile world. A catastrophe that happens on the other side of the planet affects the whole world.
We have seen this with the shortages of raw materials or with a warlike conflict such as the one between Russia and Ukraine that has left all of Europe without gas.
We have been warning about this for a long time, nobody has a crystal ball, but we need to have a portfolio that benefits from any possible solution.
Ours does, and therefore, we ended 2021 with +38.88%, and this year we are up 8% YTD.
Surely your asset management these next few years will shape the next few decades.