A long, painful financial death

We have an innate ability to make daft financial decisions. As Nick Murray states “Human nature is a failed investor”.

And, on Radio 4 recently Steven Pinker opined:

“People are more likely to regularly invest in a lottery ticket, where you’re almost guaranteed to lose, than in a pension where you’re almost guaranteed to win.”

If all we want is long-term financial security, a life of possibilities and meaning, why do we go out of our way to make that so difficult?

Take Junior ISAs. This is money that cannot be touched for years yet most are held in cash, as are most adult ISAs. Why is this a criminally stupid idea?

Because cash always, always, always loses value over time. Savings rates do not cover the loss to inflation. All that Christmas money put into a cash Junior ISA is now wasting away, it will be worth less when they reach 18 than it is today.

Cash is never “safe” because you are always losing money.

If you have ￡100,000 today it is only worth ￡95,000 in one year if inflation is 5%. You have lost ￡5,000 forever! That’s a decent holiday, isn’t it?

Over 10 years, inflation at 5% reduces ￡100,000 to ￡60,000 – nearly half your money is gone. You are much poorer than you were.

The highly addictive nature of cash is ruinous to your financial health. Cash should only be held sparingly to cover short-term expenses and emergencies.

The alternative to cash is investing. Investment returns, given enough time, have always covered the cost of inflation and then some.

Investment returns are easy and cheap to get. The same ￡100,000 could buy you shares in thousands of strong, successful companies around the world. As an owner of those companies you share in their success, you share their profits.

The trick is not to sell them. Temptation arises because sometimes, temporarily, they might be worth less than the ￡100,000 you paid for them. However, history shows that the longer you own them the more likely they will be worth more, and continue to be worth more, than what you paid for them.

On average the value of the companies you own goes up quicker than inflation. You get wealthier, you just have to accept that, from time to time, the value will fall temporarily.

In the example above the ￡100,000 in cash has reduced to ￡60,000 over 10 years. The same ￡100 pounds could grow to ￡175,000 if invested sensibly for 10 years. You would have ￡115,000 more.

You tell me which is safer.

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Being the owner of strong, successful companies makes you wealthier and more secure.

Too much cash makes you poorer and less secure – it is nothing less than a long, painful financial death.

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*** The examples above are necessarily simplified, but the evidence regarding inflation, cash returns and investment returns is incontrovertible. And, of course, there is no guarantee that past returns, interest rate or inflation will be the same in the future. And none of the above is a recommendation to act.