Doing nothing is not an option

Things have changed significantly in the investment space in recent years, but for some reason, most people haven’t changed their approach.

You’ve heard it 100 times before - Interest rates are rising, inflation is everywhere, and bank deposit rates are close to 0%. Doing nothing with your money is no longer an option, yet it is the default position for so many.

During the 1980s, leaving your money in the bank was perfectly acceptable. Banks offered up to 15% on their savings accounts - Not a bad deal.

Diligently setting your money aside while it earned double-digit returns until such time as you could afford to buy your first home for a mere 30K was a pretty good deal all round.

But for some reason, people continue to do the exact same thing to this day despite the fact house prices are ten times higher, and bank deposits pay 100 times less.

The level of inertia here never ceases to amaze me.

DON’T GET LEFT BEHIND

When it comes to human behaviour, inertia is a powerful thing. People are inherently slow to change the way they have always done things.

We only ever change what is immediately and obviously damaging to use.

Unfortunately, the erosion of our wealth is discretely pervasive, so we often don’t realise what’s happening until it is too late. 0% return from your bank account seems manageable in the short run, but over longer periods, it has a truly profound effect on your future wealth.

To understand the longer-term effects of holding your money in the bank during an inflationary environment, consider the following example of the purchasing power of $10,000 in 1971, compared to today.

According to the Bureau of Labor Statistics consumer price index, prices in 2020 were more than 550% higher than prices in 1971. In other words, if you put $10,000 under your mattress in 1971, it would have the equivalent purchasing power of about $1,800 by today’s standards. Granted, there have been some large-scale inflation fluctuations over this period, but the compounding effects are no less apparent.

So, while zero returns on your money and higher inflation may seem manageable in the short term, they can have detrimental effects on your money over time.

The Game Has Changed

Blindly doing the same thing the previous generation did in the hope of similar results is delusional.