TCFP73: How I think about investments and investing

A successful financial plan is easily understood and actioned. The investment strategy is to a financial plan what an engine is to a car. An important element but not the main element.

In fact, there is no main element. With a car the transmission, brakes, chassis and suspension are equally important. In a financial plan that equates to aims and objectives, investing and spending budgets, tax and products being equally important.

I have written ad nauseum about beating inflation being the only goal of an investment strategy, but less about what investments are and how to sensibly approach them.

So here goes. In my book an investment is something that….

1. is simple to buy and sell;
2. is easy to price;
3. always has many buyers and sellers;
4. costs little to maintain;
5. produces an income or other return without you having to do anything.

Therefore, in one way or another, gold, crypto, property, art, NFTs, wine/whisky, antiques, racehorses (this list is not exhaustive) are NOT investments.

In particular:

1. For all of the above (except gold) the true price cannot easily be known. The uniqueness of the asset (every property is different), the lack of transactions and scarcity of buyers and sellers make it impossible.
2. None of gold, crypto, art, NFTs, wine/whisky, antiques produce an income. That makes them speculations, not investments. Returns rely solely on the sale price. Which might be a lot more or less than the purchase price, and there is no way of knowing in advance.
3. Art, NFTs, wine/whisky, racehorse, antiques and property are not easy to buy and sell. There may be no sellers or buyers and/or high transactions costs and/or a lengthy process.
4. Racehorses, wine/whisky and property have maintenance costs, and might need ongoing investment.

Contrast that to bonds (loans made to governments and companies) and equities (part-ownership of companies).

Many bonds and equities are not investments because they are privately owned and suffer the drawbacks listed above. However, millions of bonds and equities are investments because:

1. they are easily bought and sold in minutes;
2. there are usually many buyers and sellers;
3. so the true price is always known;
4. the cost of buying, selling and holding is a fraction of a percent;
5. they invariably pay regular interest and dividends to their owners.

BUT, like the non-investments above, individual bonds and shares may become worthless. But that’s easily mitigated by:

1. buying many different ones so that any one of them becoming worthless doesn’t kill us;
2. buying them all over the world to avoid dependence on a single country;
3. buying all the sectors (IT, financials, utilities, retailers, etc.).

And what do we end up owning?

Thousands of companies around the world, employing millions of people who are making billions of smart decisions to make their companies better and themselves better off. Or, more succinctly, we own global economic growth.

Since about 1820, global economic growth relentlessly (with some hiccups) made all humans healthier and wealthier beyond our wildest imaginations.

I have no doubt global economic growth (and hiccups) will continue unabated; it’s the human condition to strive to improve things, human ingenuity knows no bounds.

If you believe otherwise, ask yourself these two questions:

1. What do you think gold, crypto, property, art, NFTs, wine/whisky, antiques, racehorses, etc., will be worth without continuing global economic growth? Aren’t their values dependent on it?
2. What are you doing reading a financial planning blog if you think tomorrow will be worse than today?!

As well as being the only rational investment strategy, buying global economic growth is the simplest.

Boring But Effective | Truthful, Helpful, Kind

advice@townclosefp.co.uk