Financial Adviser providing investment advice to clients

Investment decisions in a time of inflation risk

“I don’t want my super going to zero,” said a prospective client during a recent risk profiling discussion. “I want conservative investment decisions that won’t lose money over time.”

In uncertain economic times it’s tempting to avoid investment decisions and hold onto cash. This is opposite to the temptation to chase investment returns while everyone else is making money hand over fist (think 12 months ago).

One of the great things about being a Financial Adviser is that I get to talk with a wide range of different people, digging into different financial assumptions and investment psychologies. For many people, the relationship between risk and return is hard to model over different time series. Short-term risks are subtly prioritised over long-term risks, even when the investment decisions are long-term in nature.

Re-emphasising inflation risk in our long-term investment decisions

The recent arrival of sustained inflation requires us to rethink some of our assumptions around risk and return, re-emphasising the risks of taking the ‘safer’ path and investing in lots of defensive, income producing assets with a low return after inflation. With inflation running at around 6% p.a.1 in Australia, the decision to hold onto cash locks in a definite loss of purchasing power that will not be recovered in time unless we experience deflation.

At the annual Daily Journal shareholder’s meeting in February this year, Charlie Munger discussed the current market environment, inflation, and the outlook for investment assets2. Munger takes the risk of inflation seriously saying, “It’s the biggest long-range danger that we have, apart from nuclear war.” He reflects on how inflationary environments tend to disproportionately impact the poor and middle classes, and generally lead to political upheaval and regime change.

 “It’s a huge danger once you have a populace that learns it can print itself money.” Munger notes the unprecedented amount of stimulus and money printing that modern governments have been carrying out to address the impact of Covid-19 lockdowns. When asked what the knock-on effects could be he suggests, “A safe assumption for an investor over the next hundred years is that the currency is going to zero… that’s my working hypothesis.”

Recent market volatility is making us nervous with our investments

Our retirement savings take a beating during periods of market declines and high inflation (basically since November 2021). Not only is the dollar value of our assets going down, but the value of the dollar is going down too, relative to the things it can buy in the real world. In our case, the Aussie dollar has also been struggling against the US dollar, so it’s a triple whammy! And our nervousness is understandable.

But if Munger is right, and governments can’t help but solve their short-term problems by printing money, then holding large cash positions over the long run is not the answer. In fact, it would be a guaranteed strategy to take your retirement savings to zero in terms of the living standards it can support.

The best investment decisions usually put us in an uncomfortable psychological position. It can sometimes feel like choosing the ‘least bad’ option. Quality investments in businesses (e.g., shares) and property have demonstrated an ability to build value above inflation over long stretches of time and in many market environments.

Munger puts it simply when he says, “In my whole adult life I’ve never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find.”

Improve your investment decision making

Easy decisions, passive investing, and a general sense of ‘she’ll be right’ have prevailed over the last 10 years as central banks have provided ready liquidity. As this disappears in the fight against inflation, and as global trade shifts in response to Covid-19 lockdowns and proxy economic war, decision making becomes harder.

We need to be more intentional with our investment decisions.

The easy decision is rarely the best decision. Working with a Financial Adviser can help you to step out of your comfort zone and invest with an eye to long-term quality and resilience. 

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About the author

PJ_Cameron - Financial Adviser Launceston Tasmania
Peter-James (PJ) Cameron
Financial Adviser

PJ provides proactive, strategic advice to help you invest with confidence, structure your affairs intelligently, and get the most out of your unique circumstances. Contact us today and ask to speak with PJ. 

Contact us

Peter-James Cameron is a Sub-authorised Representative (#1266801 ) of Synectic Wealth Pty Ltd (ABN 24 615 317 194) which is a Corporate Authorised Representative (#1250871) of Alliance Wealth Pty Ltd (ABN 93 161 647 007 | AFSL 449221) Synectic Wealth Pty Ltd is the financial services division of Synectic. Learn more here.

This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.

  2. Inflation is how ‘democracies die’: Charlie Munger