2022 so far has welcomed us with a two-headed threat of the geopolitical crisis in Ukraine and the highest domestic inflation we have seen in decades. Recently, one of my clients brought a question to me. It might be similar to thoughts that you or some of your friends may be having, and I hoped it would be a benefit to share my reply. Please let me know if you’d like to discuss further.
Best regards, Frank
Hi A,
Thank you for your message! It sounds like you have a lot of wonderful things planned.
As unpleasant as markets have been so far this year, 2022 has been a valuable learning opportunity for all of us: it has juxtaposed short-term risk with long-term risk, and obliged us to consider the balancing act between the two.
In your message, you wrote; “I would like our numbers to stay unchanged or naturally to increase, especially since we are turning 71 years old this year.” I can definitely understand how you feel! However, as you know, this is not how markets operate. The only way that anyone can generate this behavior is by exiting the markets and holding pure cash.
Before you make changes to your strategy, we should ask this question: “What are we trying to conserve by being conservative?” This is a valuable question because there are two definitions of “MONEY”:
- The dollars and cents in your accounts, also known as your “principal”
- Your ability to buy things, also known as “purchasing power”
You have probably heard that Inflation is at a 40-year high, and is currently around 8% per year. If this rate persists, it means that in less than six years, the cash that you have today will buy literally half as much gasoline and tires. Half as much medicine, and half as much food. This is not an exaggeration, nor is it abstract, it is a mathematical outcome based on the data. Investors must fully grasp that the threat of rising prices to our future plans is existential.
With regards to the two definitions of money above, it is impossible to protect both your principal and your purchasing power. In fact, the more we try to protect one, the more risk to the other we have to accept. “Conservative” investors often try to protect their principal by holding cash or by moving in and out of it from time to time, without realizing that they are degrading their purchasing power each time. Cash has a fixed value, but a declining worth. It’s good for things in the present, which you know the prices of. Equities have a fluctuating value but a worth that can beat inflation, and historically have. They are important for paying for things in the future, which we do not know the prices of (although they’ll probably be higher).
One of the things that I have found is that there is no such thing as an “aggressive investor”. There are “speculators”, there are “savers” who are trying to conserve their principal, and there are “investors” who understand that they must conserve their ability to buy things and to accomplish their goals.
I will argue that your ability to buy things and to fund the dreams and destinations in your future is what we should focus on protecting. I will further argue that the temporary fluctuations of your portfolios from one quarter to the next is trivial by comparison (and the relative changes in value of one account compared to another is meaningless). Observe that market declines in Q1 have had zero impact on your upcoming itinerary. As for future road trips, it is not the price of stocks that matters, but the price of gas.
My advice is that long-term outcomes are the only ones that really matter. If you believe that you have all of the purchasing power that you will ever need, and that you have the resources to support any future price increases on anything, then there is no need to invest your money as we are and to tolerate shortterm fluctuations. Otherwise, as uncomfortable as it can be from time to time, remaining focused on how we grow your wealth to keep up with rising prices is our priority and is my mission.
Best regards, and have an amazing grand tour of our beautiful United States and a wonderful time with your family. I can’t wait to hear about it.
Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
27499 Riverview Center Blvd, 108
Bonita Springs, FL 34134
Any opinions are those of Frank Hujsa are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.
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