Door Freddy Forger
"Inflation" is currently dominating the news. Everyone experiences sharply rising prices for goods and services in their daily lives. We call it "tick-tack inflation." Because of this inflation, we can buy much less with one euro than a year ago. But what effect does this inflation actually have on your wealth? At Stoic, we base our analysis purely on rational facts, and they tell us that this is much less detrimental than you might expect.
Our current "tit-for-tat inflation" is partly caused by the war in Ukraine. This has caused electricity and gas prices to rise dramatically, making the production and distribution of goods and services much more expensive. Moreover, the coronavirus crisis has created a major logistical problem, resulting in goods and people being in the wrong places, creating a huge supply and demand issue. All of this, of course, is being factored into prices, which are currently rising sharply.
Our everyday goods and services are becoming (much) more expensive, which is causing social problems: people on low and middle incomes are barely making ends meet. This is incredibly frustrating, but fortunately, history teaches us that such periods are generally relatively short-lived. Because if prices rise too much, demand eventually declines. As a result, demand becomes less than supply, with the result that market forces will cause prices to fall again.
But what effect does this inflation have on people with substantial assets? Many people assume this effect is enormous: if the money in a regular household wallet decreases in value, the value of investments will also decrease proportionally. And since these are large sums, the decline in purchasing power will be proportionally significant, right?Fortunately, it's not that bad. "Tic-tac-toe inflation" actually only affects the portion of wealth used for daily living. Purchasing power decreases in that portion, but there's little you can do about it. There's no other option than to simply be frugal, trying to make ends meet with the same amount of money. Or you can use a surplus of your wealth, which you'd actually invested for a longer period.
Suppose someone spends €50,000 per year on everyday items. And suppose inflation increases by 15% in one year and by an average of 5% per year (that's actually an extreme situation). While the actual amount is thousands of euros, it has only a limited effect on the total wealth increase.
What's far more dangerous for large fortunes is so-called "asset inflation."
"Asset inflation" is the rise in the price of scarce, valuable assets, such as stocks or bonds. To address the financial crisis of 2008 and 2009, central banks decided it would be beneficial to inject more money into circulation to get the economy moving again. This extra money was injected into circulation by the central bank, buying up savings products from banks, such as stocks and bonds. The thinking went that this would suddenly give the banks more cash to circulate.
This means that if a wealthy person hadn't invested their wealth in stocks or bonds during this period, they would have seen the purchasing power of that "uninvested" wealth decline by as much as 25% to 50%. Clearly, "asset inflation" poses a much greater threat to wealthy individuals than the current "tit-for-tat" inflation.
Conclusion.
If you have a substantial amount of wealth, protect yourself against asset inflation and forget about the tic-tac-toe inflation. You can do this by investing the assets you won't need for more than 10 years in all stocks worldwide. This ultimate diversification avoids unnecessary risks, and your money grows steadily in purchasing power terms with the global economy. Money you need for more than 10 years (for example, for daily expenses) is better held in cash, or perhaps invested in a safe combination of bonds and gold. In times of inflation, a slight loss of purchasing power can occur. You can compensate for this by spending less, or by withdrawing some of the money you had actually "parked" in stocks for a longer period. It can be that simple if you stick to the facts. And that's exactly what we do at Stoic.
