Our family has a tradition of going apple picking each October. It is a wonderful time to get outdoors, walk the orchard, and taste all the different varieties. The bushel we quickly fill is more than enough to eat, bake, and share with friends and neighbors.
Apples, like many items today, cost more than they did years ago. For example, $10 of apples in 1991 costs $19.70 today. Think about that for a minute, why is that?
Same amount of apples and the cost is almost double over a 30-year period. This is what economists call inflation, or what I like to call more simply “the rising cost of life.” Most things we use and consume throughout our busy day will cost more overtime. This is an essential concept to be aware of when investing. Rising costs rarely arrive all at once, often it’s the slow price increase creeping up overtime that adds up.
So, what do a bunch of apples have to do with investing? First, recognize the things we enjoy today may likely cost more in the future. Second, investing should have a purpose that allows your dollars a better opportunity to keep pace with rising costs. Third, cash is necessary to purchase apples or whatever you’d like so the remainder may stay invested for long term sustainability.
Many believe the purpose to investing is growing or increasing what they have. Investors are looking for more or larger values in their account, more is better than less, right? True, but this entirely misses the most valuable lesson when investing for tomorrow.
The purpose to investing is to hedge rising costs over extended periods of time. Think, decades as opposed to months or years. Repurposing your time in your 60s will require an income that continues to meet your essential and discretionary spending needs in your 90s. How do you create an income that may last that long? Investing in diverse companies of all sizes and locations. Their values and long-term price appreciation, dividends when available, may support rising costs. If you doubt costs will rise significantly overtime, then ask any retired individual or couple about their income and spending. Is life more expensive today then it was ten or twenty years ago? I am sure you may guess their obvious response.
This is not an easy concept for our brain to process and our behavior to follow. It’s much easier and natural to invest in something that does not fluctuate in price. That stability feels good but does come with a cost. Like the price of apples, increases sneak up on you overtime so you need to spend more on the things you enjoy. That stability that felt great at 60 suddenly doesn’t look so good as you approach your 80th birthday. Holding assets that do not fluctuate in price will require liquidations overtime to keep up with rising costs. Once you begin selling and your sum of investments begins to shrink, you are cooked! The art of planning should remove this surprise today so you may invest appropriately based on your time horizon.
Granted, it is extremely uncomfortable to sit still when the companies you own are contracting in price. Price contractions are routine and should be expected. All companies contract in price from time to time, some more frequently than others. Without a financial plan that raises awareness on your future purchasing power, an investor may sell these great companies when values temporarily shrink. It’s human nature to avoid losses, and when playing the game of “more” losses set you back. It’s easy to follow this pattern of behavior for years until you ask yourself, maybe there is a better approach?
That approach is to accept and welcome the volatility in company values overtime. Do not attempt to rationalize what’s happening now or tune into the noise taking place. Nope, simply purchase what you can do consistently and assess your progress periodically. Progress is not defined by gains or losses in the moment, but by how much closer you are to achieving the goals you set.
Automation and increasing what you invest overtime, allows you to spend with less worry today. Cash reserves support the role of short-term purchases and necessary liquidity. Most everything else may be allocated towards a more expensive tomorrow. Many of your future choices and options will be supported by the income possible from your investments. It’s relevant income that matters in the long run and that determines what you may have and do with your time.
If you’d like to learn more about rising costs and their impact on your spending tomorrow, reach out and we’d be happy to chat with you.