What is inflation and how does it affect me?
Inflation has been around a very, very long time. We have only taken note of it now as it’s a lot higher than what we have been used to over the past twenty years. Those of us who remember the 80’s might be a little bit more familiar with the daunting word. So, what is inflation and how does it affect me? Inflation is the decline of purchasing power of a given currency over time, in our case the decline in the purchasing power of the Euro over time. Typically, inflation has been at circa 2%. However, as of March 2022 inflation in Ireland was 6.7%: up from 5.6% in February 2022.
How does inflation affect me? It means the money in your pocket is worth less today than this time last year. It means you will pay more for goods and services because your money is worth less. Inflation is the permanent erosion of your wealth.
John’s retirement plans
Let’s consider a real-world example. John’s dream or aspiration is to buy a campervan and explore the open road with his partner upon retirement, while remaining comfortable in retirement. Inflation runs at circa 7.7% over the next three years. Thus, reducing the purchasing power of John’s pension fund by 25%. The impact for John is that three years of inflation at 7.7% means that John, who has worked hard all his life cannot afford his dream camper van trip. Instead, he settles for a staycation. Alternatively, John may have a lower standard of living throughout retirement.
The solution to the problem is one we agreed with all of our clients at the outset of their partnership with Metis Ireland. Our promise to you was that there would be stock market highs and lows, also known as volatility. Our promise to you was that you must stick with the plan and participate during periods of volatility as this is one area where new wealth could be created and making changes could permanently erode the value of your pension or investment fund. Our promise to you was that when your gut said jump ship, we would help you to stay in your seat and stick with the plan. So, what is the solution. John should be invested in hugely diversified fund that invests in the great companies of the world. John should follow his financial planner’s advice. Why?
Multiple studies by Dimensional Fund Advisors and others, have proven that partnering with a great financial planning firm can add 3 – 4% to investors returns. At Metis Ireland we do this through keeping your costs low, investing in the great companies of the world and helping you stick with the plan. These companies create new wealth through innovation, R&D, Mergers and Acquisitions. These companies share their profits with shareholders. Simplifying things, a little bit, this creates demand for these shares or stocks and increase the share price over time. Thus, increasing John’s wealth to combat inflation over a long-time frame.
Have we any evidence to prove that investing is the best way to outperform inflation? Indeed, we do! If we took a snapshot of a period of high inflation, between 1962 and 1991. During this period inflation in the UK was 8.1% per annum. That is staggering!!! Over a thirty-year period inflation was 8.1%. That means if you had €100 in your pocket, by 1991 it would be worth €10. At the same, over the same period, investing in the great companies of the UK, the return on investment is 14.1% per annum. That’s a real return of 6% per annum. Without fail, by John sticking with the plan, he has his Campervan and is comfortable in retirement. John didn’t speculate or try time the market. John focused on what works and has always worked.
In summary, engaging a great financial planning firm, who guides you through volatile times and helps you avoid any big mistakes is a proven strategy. With that, to combat inflation, our clients have to be invested in the great companies of the world and receive a share in their profits. These companies offset their prices by increasing their costs, hence maintaining their profits. It is vitally important our clients are invested with them during inflationary times. With that, if you have or plan to sit with Metis Ireland for financial planning coaching, we will devise a plan for you and coach you through the fundamentals – #stickwiththeplan.
Financial Planning Executive
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.