Tag Archives: inflation

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Balloon Dress

C Balloon Dress

What’s it going to be—inflation or deflation? Everyone has her own opinion and there’s a good case to be made for either outcome. Governments have been printing money for some time now. According to the recent investment letter from Francis Chou, money printing is growing at an annualized rate of 7.2 percent. Extra low interest rates are causing asset bubbles in real estate and some equities. Fair-to-middling companies with decent dividend yields are in high demand, jacking up their share prices accordingly. Some government bonds carry a negative yield, or, in other words, you pay to invest in them.

On the other hand, you don’t have to be an economist to see that global growth is ticking down. China’s ghost cities, Canada’s woeful oil and gas sector, Brazil’s fiascos, India’s dubious GDP metrics. The U.S. is growing but ever so gingerly. The world is a different place than it was in 2007. It will take some time to absorb the excess supply of commodities. And, then there’s the aging demographics in North America and Europe that could potentially put the brakes on business start-ups, spending and investing. When the inflation rate is less than zero, hello deflation. Deflation is accompanied by high unemployment levels, low prices, and reduced private investment and government spending. Once a region dips into deflation it’s like swimming in a sea of molasses. Japan floundered for a decade.

At a recent lunch hosted by Burgundy Asset Management, I cornered one of their investment honchos and posed the inflation/deflation question. He felt that deflation is the bigger short-term risk. However, others say that, longer term, inflation is not out of the question to absorb all that printed money. (Longer term can mean a decade or more away.)

In his annual letter to shareholders, Chou recounts Sir Winston Churchill’s skirmish with MP Bessie Braddock. During one of Churchill’s benders, Braddock told him, “Winston, you are drunk, and, what’s more, you are disgustingly drunk.” Upon which Churchill replied, “My dear, you are ugly, and what’s more, you are disgustingly ugly. But tomorrow I shall be sober and you will still be disgustingly ugly.” 


Lucky Strike


Photo courtesy of Artotem

Photo courtesy of Artotem

“Nobody gets justice, they either get good luck or bad luck.”

So said American actor and playwright Orson Welles who had generous helpings of both during his life with bad luck tipping the scales. (Read My Lunches with Orson for more on this fascinating and ill-starred man.)

One word that doesn’t come up a lot in investing circles is ‘luck’. But it should. Luck plays a bigger part in total returns than most of us would care to admit. It’s an especially crucial ingredient during our retirement years. And, unless you’re a rishi, it’s something you have absolutely no control over.

Students of finance learn about the Time Value of Money. This is the concept that present money is worth more than future money due to its earning potential. For example, if you have a million dollars today and invest it, it will grow to more than a million dollars in 20 years. Getting a million in 20 years time is therefore worth less than getting it now.  (Layperson’s Translation: “A bird in the hand is worth two in the bush”.)

If you have the good luck to retire on the cusp of a secular bull market, your investments will continue to grow even as you distribute them in the form of income and gifts. On the contrary, if you happen to retire when the market is tanking, (or inflation is growing), you’re going to burn through the funds much faster. This is part of what makes up the Time Value of Fluctuations.

Here’s a nifty example: Say your portfolio loses 5% this year. No biggie, right? Next year it’s going to have to make 5.3% to break-even. That’s achievable. Now let’s take a 30% loss. To break-even you’ll have to achieve a return of 42.9%. How likely is that? An 80% loss will require a 400% increase. (In other words, Game Over.)

Capital depletion, (through market crashes, inflation or a too-rapid withdrawal rate), means that, even when the markets bounce back, your particular bounce is going to be relatively small because you’ve got less capital to propel it.

So, what to do?

First, open a bottle of wine and pour yourself a glass. If you’re on the cusp of retirement, pray for a bull market that never ends or a large inheritance.

Or you can do the following:

  1. Try not to exceed an annual withdrawal rate of 4%.
  2. Find other sources of income like a part-time job, or delay retirement until you have a topped-up nest egg.
  3. Make capital preservation a priority in the early years of retirement. Getting walloped in the first four years could permanently crush your portfolio. Some advisors even suggest moving all your assets into GICs and T-bills at first to ensure the safety of the capital. (This has tax implications so do the math first.)
  4. Set aside 1-3 years of income in money market funds so you don’t have to sell assets at a loss during a market downturn.
  5. If you don’t have a defined benefit pension plan, consider buying an annuity that pays out a steady income regardless of market conditions.

Luck is the ghost in the machine. You know it’s there. Don’t get spooked.