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The two most important words in financial planning?

Could they be “permanent” and “temporary”? Confusing one for the other means we could be on a hiding to nothing.

Things that are permanent need our attention. Things that are temporary do not.

Two common errors in financial planning are to think that inflation is temporary and stock market losses are permanent. In fact, they are exactly the opposite.

Inflation is perpetual and the effect permanent – £1 today will be 99p tomorrow and 98p the day after that ….

Making excuses for inflation denies the simple fact that inflation makes you poorer and needs attending to. Who, in their right minds, wants to be poorer tomorrow than they are today?

On the flip side stock market losses are temporary – they always have been. Yet they are reacted to as being permanent.

If the value of the companies you own was £1m but dropped to £750,000 before being worth £1.25m today, the “loss” was temporary.

You could of course turn this temporary loss into a permanent one by selling the shares for £750,000.

The double whammy is that shares are easily the best antidote to inflation. So not only does selling the shares at a loss create an immediate permanent loss, but inflation will also get to work and make the permanent loss much worse.

You do not need to take my word for it – the historical record is unequivocal on both points.

CLICK HERE to get the annual rate from any date you fancy. £1,000 of goods and services in 1972 (my year of birth) would cost over £13,000 today. Wow.

The graph below tracks the value of a well-diversified portfolio of great companies around the world. The MSCI Developed World Index covers big and medium sized companies across 23 developed countries. Since it started in January 1970 it has returned just over 8% pa on average.

Where on the graph are there any permanent losses? In fact, the graph shows a relentless advance over the last 52 years.

£1,000 invested in 1972 is worth £48,000 today. Wow.

If I take off the £12,000 inflation has cost me, I have an extra £36,000. Wow.

Past performance (of both inflation and the value of companies) may not be a guide to future performance, but you cannot argue with the facts to date, can you?

This immense wealth generation was available to you and your families for the last 50 years. For the next 50 years I will bet you anything you like you and your families and future generations can enjoy the same.

Just do not confuse temporary with permanent. And permanent with temporary.

 

Boring But Effective | Truthful, Helpful, Kind

advice@townclosefp.co.uk 

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