On what fraction of your wealth can you tolerate wiggling in price?
At the heart of our approach to investing is the idea that we get paid to endure volatility. Short-term fluctuations matter less and less the longer the time horizon; living with volatility is an integral part of seeking true investment market returns.
Your wealth may be divided into that fraction that may wiggle… and the rest: the part that must remain stable in value, either because it is to be used in the near future or for your own preference about liquidity.
When inflation was near zero and interest rates were near zero, stability did not cost much: it was likely that a dollar put away in a stable form would still buy a dollar’s worth of goods or services a year hence.
But the situation is changing.
With the cost of living rising by 3 or 6% and interest rates still near zero, money put away in stable forms is losing purchasing power by the day. Money that needs to be stable will buy less and less, year by year, while inflation is greater than interest rates.
It may be time to rethink the question: “On what fraction of your wealth can you tolerate wiggling in price?” When the cost of stability was close to zero, it was easier to justify stable money balances. Now, stable money not only misses out on the risks and rewards of long-term investing, it may act more like lumber exposed to termites, a force that eats away at its power over time.
If a person is not suited for this approach, if they are not within our niche market of the mind, or not tolerant of volatility in the value of money meant for the long term, these coming changes in the cost of stability will not affect their desire for stability.
But… some have embraced the advantages of “some of each,” of thoughtfully pursuing both some stable balances and some investments that wiggle. For these folks, it may be appropriate to rethink the proportions at this moment.
Clients, if you would like to talk about the balance among your holdings, please email us or call.
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