Everyone likes the idea of being financially independent. But how to get there, what steps should be taken to get to the point where you no longer worry about money, because you have enough?
It is important, firstly, to reflect on what financial independence means to you, because the definition varies from person to person? Not everyone aspires to travel First Class, for example. But, whatever your personal preferences are, in our view the only sensible definition of money is purchasing power. With that in mind, your greatest challenge is not to preserve your capital, but to preserve your purchasing power.
The enemy is inflation (the general cost of living rises), which over time erodes purchasing power. Inflation has not been a concern in recent years, but the huge amounts of cash injected into economies to counter Covid may change that in the future. More cash chasing fewer products may increase the rate of inflation.
Historically, company stocks (shares) have consistently outperformed inflation over the long-term. Examples include PayPal, Microsoft, Philip Morris, and Estee Lauder all of which are high quality and resilient global growth companies that are considered good value for money.
When you invest in company stocks, however, the price of admission is market volatility. Most of us have heard the expression that the price of shares or units in an investment fund can go down as well as up – that is what this refers too i.e., the possibility that your investment could fall in value, as well as rise.
Throughout every year, stock markets have periods when they decline (drawdowns) typically by around 15%, and in extreme circumstances (Covid being an excellent example) by at least 30%.
The timing and reasons for those market drawdowns cannot be predicted and often do not coincide with economic trends. Who could have predicted that markets would fall like a stone in March and bounce back to finish the year 2020 in positive territory. Those investors who panicked and sold their stocks in April or May learned an awfully expensive lesson. Investors who bought the dips, so to speak, profited immensely.
Stock market volatility can only be avoided by choosing not to invest at all – but that means sacrificing long-term returns which does not make financial sense.
Most people struggle emotionally with the ups and downs and unpredictable short-term nature of stock markets. In the words of world-renowned investor, Warren Buffet, “Be fearful when others are greedy, and greedy when others are fearful”.
This is where an experienced guide comes in. Take the first steps to becoming financially independent – contact us now to arrange a no-obligation Discovery Meeting or phone call.