How do we evaluate our investments to understand how we are doing? For most, we compete with a stock market index, our friends, or maybe some publication we follow. But how do we know if we are doing well? Or, more importantly, what should we be aiming at when it comes to our investment returns?
Why we are all investing in the first place and what people believe they are investing for are two totally different things. For most people, investing has now become gambling. We seek high returns, we seek multiples of our money returned to us, and we assume the time it takes to grow our wealth we grow shorter and shorter.
So where should we be focusing our attention when it comes to our investments….? The answer is inflation.
Inflation is a relatively simple concept. In a nutshell, price out a basket of goods (food, coffee, housing, furniture, etc.), then reprice it year over year. To put that in a visual context, check out this chart from Investopedia.
A coffee was a $0.25 in 1970 and probably closer to $4.00 in 2020. As of this morning, Starbucks charged me $4.54 for a large cold brew. So yes, cost do rise over time.
Now with inflation, there is a lot going on under the hood. Everything from changing market dynamics, consumer tastes and preferences, and how the world evolves. But pricing out this basket of goods give us an idea or projection of how much money we may need in the future.
The money you have in your pocket today might not cover the cost of coffee a few years down the road. So instead, we invest our money for the future to allow it to grow and keep up with inflation.
Now, here is where our investments tie in. Keeping up with inflation is the bare minimum we should aim for with our investment returns. Allowing us to keep up with rising costs, is what we want our money to do.
The issue most investors face is not picking which stocks, bonds, or some alternative to grow their wealth but instead the inability to take any some action. I see clients every week who are piling money into savings and checking accounts with the mindset they are “saving for the future”.
Cash pays virtually nothing and hoping your savings account keeps up with inflation is a fool’s errand. See online savings rates as of this month.
So here is where the idea of “look down, not up” comes into play. While most investors keep striving for a higher and higher investment return, we continue to move away from what we are really aiming for. We aim our sights on a more volatile benchmark or a higher risk tolerance with the goal of more returns!
Why am I not outperforming the S&P 500?
This quote is bounced off the walls in my office over and over again. Most of the time due to sheer confusion as to who we are actually competing with. Our entire portfolio does not need to outperform everyone and every benchmark, instead, it just has to outpace rising costs over your lifetime.
The chart above shows who your enemy actually is. Hint hint…its inflation (the blue line).
Our goal is not to chase the S&P 500 or outperform every small cap portfolio. Instead, our goal is to put as much space between the inflation and our portfolio to reduce the time we have to work, or whatever goal we are working on easier to achieve.
Time is on our side when it comes to winning this battle. But the more time spent pacing with inflation, the less time we have to outpace inflation.
The more time you can compound your investments, the more you put inflation in its place!
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