There’s no getting away from it. 2022 was a painful year for most investors.
Traditional “medium” risk portfolios were down around 12% because of issues I think we’re all aware of; the war, ongoing Covid supply chain issues and rising inflation, which hasn’t been as transient as the Central Banks initially expected.
It transpired to be a worse year than 2020 when Covid emerged. We saw a substantial sharp drop followed by a quick recovery, leaving investments in positive territory over that year.
Although we’ve seen some uptick in 2023, we are still to see last year’s numbers completely restored as central banks continue to grapple with inflation.
I appreciate times like this can be frustrating for investors.
Not to make light of the current situation, but if we were to play financial adviser bingo, you’d hear us say have a cash reserve to weather storms, investing is a marathon, not a sprint, and be well diversified with hundreds of eggs in your baskets.
And perhaps most importantly, try to tune out the media noise. Remember, the media is not your friend, and NEWS now stands for Negative Events World Service.
I know it’s easier said than done, but there are a couple of potentially dangerous things that can happen at times like this:
1 – In trying to find an investment panacea (which exists like Santa and the tooth fairy do), you can find yourself in dangerous investments you really don’t want to be.
2 – Or, you could be tempted to bail and hold all your money in the bank. Cash seems attractive right now, and understandably so. After almost 15 years of sub-1 % interest rates, we’re in 4-5%+ territory. Happy days? Or is it really?
It is dangerous to overdo cash in the long term. 1% interest not so long ago, when inflation was 3%, seemed a terrible return to many. I’d hear it said daily, “Interest rates are rubbish”.
But when one of the main goals of investing is to protect capital from inflation, can we think that 4% interest with near 7% inflation is now great?
This gap between interest rates and price inflation will erode capital over time and impact your goals, such as living well in retirement and passing money on to your loved ones.
I have a relatively simple way of looking at inflation.
When I started going out 30 years ago and in the sweet spot of life – no kids, mortgage, any of that proper adult stuff – Quids Inn genuinely was a quid a drink. Now it’s over three times that, in one of the cheapest places in town.
That’s over three decades, which is pretty much what many people spend in retirement.
If you’re holding too much cash for that length of time you could be in trouble.
Like everything in life (including drinking!), it’s about getting the balance right. The right amount in cash to help you sleep at night and the right amount invested so inflation doesn’t hammer away at it.
If you need help getting this balance right within your finances, by all means, get in touch.