The Stock Markets
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Inflation: The Enemy That Never Retreats
Other Essays Produced This Month
Other Essays from the Archive:
Don’t Neglect The Golden Goose
Regret Minimisation as a Decision-making Tool
For all other essays, see the full archive on the content page.
For more than a decade, inflation around the world remained at low levels. Measured as the change in price of a basket of goods over 12 months, inflation was low enough that investors had forgotten about the impact that rising prices have on their money's purchasing power.
During this period, the silent but steady increase in prices went largely unnoticed by consumers and investors alike. Notwithstanding this, we believe that inflation is the number one enemy of the long-term investor. While this dragon might have been slumbering for much of the century’s second decade, it was about to wake up in a foul mood.
Starting in early 2021, inflation soared due to extensive government money-printing, COVID-19 supply chain constraints, and the effects of war. In late 2022, it reached levels many investors had never experienced in their adult lives.
For close to three years, consumers had to adjust their budgets to account for meaningfully higher living expenses. Let’s explore some lessons we hope will not soon be forgotten.
Temporary Respite, Permanent Scars
In response to the inflation pain, central banks around the world raised interest rates to combat the forces driving up prices. With access to money becoming more expensive, the demand for many goods and services decreased and debt became more expensive to service.
Inflation slowly started to decline and now, two years after the high water mark, most countries have brought inflation down to “normal” levels. In addition to helping families afford the basic necessities, it will also allow central banks to start lowering interest rates.
While headlines may celebrate declining inflation rates, it's crucial to understand that the damage inflicted is often permanent. When inflation slows, prices don't magically return to their previous levels; they simply stop rising as quickly.
New baseline prices have been set, and while short-term increases are expected to be low, the scars of the last few years will remain forever.
Looking Ahead
To learn the right lessons about this period, this truth cannot be overstated: while inflation was temporarily high, prices have adjusted forever.
Understanding this concept is vital because it underscores the importance of proactive financial planning. The inflation we've experienced isn't a temporary inconvenience—it's a lasting change to our economic landscape.
Rather than hoping the last three years are never repeated (an unlikely scenario), every investor can apply the lessons of this period in three immediate ways.
Firstly, we can review our personal basket of consumption. Are the goods and services we buy aligned with what brings us meaning and happiness, or are we spending superfluously? Are there better ways of achieving similar outcomes? Living within our means will always be the foundation of financial independence.
Secondly, are our assumptions about future inflation levels reasonable and evidence-based? Are you relying on low inflation levels to make your money last, or are you positioned to withstand regular periods of higher inflation?
Thirdly, do we understand which investment assets are likely to best protect us from the destruction of purchasing power that inflation brings? With money we invest for long-term income needs, we must seek investments that can outpace inflation over time. Global equities—partial ownership in publicly listed companies—have historically proven to be one of the most effective tools in this fight.
Well-managed companies can adapt to inflationary pressures, raising prices, improving efficiencies, and growing their value. Over the long term, this growth has typically outpaced inflation, preserving and enhancing investors' purchasing power.
The Path To Victory
As we’ve so concretely been reminded in the last few years, the key to protecting our financial future is understanding that the true definition of money is purchasing power—what our money can actually buy. This is the only sane definition of money.
While inflation is a formidable foe, it's not invincible. By staying invested in assets with the potential to outpace inflation, you can protect and grow your purchasing power over time.
However, you don't need to take this journey alone. We can help you make appropriate trade-off decisions, adjust your strategy as needed, and ensure your portfolio remains positioned to combat inflation's effects.
Our financial planning and investment process is designed to ensure that your financial journey ends with a resounding victory over the dragon that is inflation.
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😀 Rational Optimism
The media is not a friend of the disciplined and patient investor. Ignoring the key determinants of lifetime investor returns, the media focuses on short-term returns, market predictions, and negative news.
We present the following as an antidote to the onslaught of negative news:
The Surprising Truth about Wealth and Inequality in the Westx
New Study Finds Commercial Air Travel Keeps Getting Safer
AI Technology Keeps 6,000 Deer from Rail Routes
📰 Read
The Sustainable Path is the Only Path [5 minutes]. The key to lasting success in life isn't about quick fixes but about making sustainable choices that align with who you truly are.
Life Span, Health Span, Wealth Span: A More Expansive Approach To Retirement Planning [4 minutes]. Transform not just your retirement planning but the quality of your entire life.
Summer Travels: Applying Lessons from Die With Zero [14 minutes]. Emphasizes the importance of planning experiences at optimal times in life.
A Few Little Ideas And Short Stories [7 minutes]. Insightful lessons hidden within intriguing anecdotes.
Stop Paying Attention [4 minutes]. Ignoring the noise of financial markets can lead to better investment decisions and greater long-term success.
Overchoice and How to Avoid it [5 minutes]. Reclaim your decision-making power with practical insights.
🎧 Listen
Humans Are Not Built For Investing [15 minutes]. Our inherent biases and emotional pitfalls make investing a challenge.
🍿 Watch
Underrated Stoic Advice For A Better Life (From Seneca)
🖼️ A Picture is Worth a Thousand Words
Mapped: Countries With The Highest Positive Emotions
The Number of People Born Every Year, by Region (1950–2023)
Mapped: The World's Largest Stock Markets (1900 vs 2023)
We hope that you enjoyed this month’s newsletter. Please let us know what you enjoyed, or write back with any of your own news.
As always, we're here for you.