Around 6 million years ago, when the first humans roaming the Savannah would hear a rustling in the long grass, there were generally two outcomes: those who ran first and asked questions later escaped with their lives, while those who thought they knew better quickly became lunch. Nobody was ever killed by long grass blowing in the wind, but those who waited long enough to find out did so at their peril.
As such, the people alive today are the ancestors of people who ran away at the first sign of danger. Although most of us don’t worry too much about sabre-toothed cats these days, we simply cannot shake the instincts that brought us into the 21st century.
People are programmed to be fearful of risks that don’t really exist, just in case they do. This is why it’s almost impossible to separate temporary declines from permanent losses when it comes to our investments. However, a permanent loss in the stock market is a man-made phenomenon the market itself has never been capable of. It’s an action driven by our deep-seated fear of what might happen, despite what we know to be true.
The Real Risk
The greatest risk to long-term wealth creation and preservation is the rising cost of living. In 1992, the price of a first class stamp was 24p. In 2022, the same item will set you back 95p. Inflation has more than tripled the cost of posting a letter in just 30 years (without splitting hairs, let’s call this the average lifespan of a couple retiring at 60). Put another way; you need 3.5x more money today than you did to buy the same thing 30 years ago.
The real risk we are faced with as long-term investors is not stock market volatility, it is the rising cost of living.
Slaying The Beast
The most powerful investment strategy is one focussed on fighting against the greatest wealth destroyer of all – inflation. The only way to consistently ensure your money sustains its purchasing power and grows in real terms over time, is to own a stake in The Great Companies of the World (global equities). As a consumer-driven society, we are more than ready to spend our hard-earned coin on things and stuff we believe will enrich our lives. Yet we are somehow reluctant to invest in the same companies we, as the consumer of goods and services, are generating profits for. We’d sooner buy the latest iPhone or Surface Pro than invest the same amount in Apple or Microsoft.
We especially like buying things and stuff when there’s a sale on and prices come down. Inexplicably, the only thing we’d ever consider selling at a price lower than its true value, whilst telling ourselves it is a good idea, is our investment portfolio. To compound our irrationality, we’re then inclined to buy in again when prices inevitably bounce back up. Why people are willing to do this is truly one of life’s great mysteries. And still, every time there is a temporary decline or a sale in the Great Companies of the World, our instincts make us want to do the exact opposite of what we should. We fear a risk that doesn’t exist, as this famous sketch by Carl Richards perfectly illustrates.
It is possible for just about anyone to own something which produces a rising income and increasing capital value over time. However, because we think of investing as ‘risky’ and ‘complicated’, we are fearful, despite the evidence.
Capital returns delivered by the stock market are a force of magic. To be touched by this magic, all we need is a well-structured, globally diversified portfolio as the basis of a comprehensive financial plan. We can then get on with enjoying the good things in life. The alternative is a life of fear, anxiety and financial ruin. The choice, as they say, is ours.
This is not advice based on your own personal situation, obvs.