Are you going backwards financially?

Jul 21, 2022

Whenever I talk about investing, I'm almost guaranteed to be asked two questions:

  • Is now the right time to invest or should I wait until the market is better?
  • I don't have much to invest, is it worth it?

The answers are often, now and yes.

That's because most of us don't have a crystal ball and can't predict what's going to happen in the future when it comes to investing highs and lows.

If we think back to March 2020 when Covid first crashed the party, many economists predicted in Australia that the housing market would drop between 20-40%. Certainly, at the time, that seemed like a fair prediction. But what we know now is that sure, in some major cities (such as Melbourne and Sydney) there was a retraction, particularly with apartments. But many more suburbs saw an increase of between 20%, sometimes 40% and even more.

If the experts can get it so wrong, where does that leave the rest of us? For too many people, it leaves them hoarding cash in their bank account because they’re too fearful to invest.   

There is a lot of talk about fight or flight when it comes to fearful situations (and money can be that for many people) but what we don’t talk enough about is freezing. Freezing because we’re afraid to invest because of the uncertainty and instability of what the market seems to be doing, the conflicting opinions of experts and the clickbait headlines of media.

Freezing might feel safe, but it can see you sliding backwards. If you’re hoarding your savings in cash, you might believe your money is safe and certainly in Australia, your capital is.

What you might not realise however is the very real chance that your money is going backwards. You probably equate falling prices with the share market, but if you’re only saving cash in the bank and treading water, that could be what is happening with your savings too.

For example, Inflation may erode the purchasing power of your money (this means that a fixed amount of money will buy fewer things in the future). So, if you’re investing all your money in cash in the bank, you may find that $1 today is only worth $0.80 in seven years’ time.

Now, 20 cents might not seem that much, but let’s look at what that might mean for larger sums. Let’s say you had $20,000 in savings in a bank account today earning 1.5% interest – in twenty years’ time that would amount to $26,992. Not bad.

The problem however, is when inflation is above that. Historically, inflation sits at about 2.11% which means in 20 years’ time, you would need $30,319 just to have the equivalent of $20,000. In other words, you’re behind almost $3,000.

Suddenly, simply saving cash in the bank because you’re scared to invest can start to seem unsafe. It highlights that there can be risks with being too risk averse and freezing during times of uncertainty.

Of course, it’s important to understand the time frame you’re looking at (you wouldn’t risk your house deposit in the share market) and your risk profile.  But if you’re not investing because you’re frozen, it’s time to figure out how to get you unstuck.

What’s important to understand is that no-one can accurately predict what will happen when it comes to investing and markets.

Yes, we can give educated guesses, we can look at all the variables we’re presented with and give opinions but unless someone has invented a time capsule, no-one knows for sure. That’s why, instead of trying to predict the market and highs and lows, it’s about time IN the market.

For most of us that will mean sometimes we buy when the market is at its peak, or at its lowest or somewhere in between. But if your aim is to hold for the long term (more than seven years), then ultimately, in 20 years’ time, those highs and lows won't matter.

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