I remember hearing this quote from the BBC when they were doing a story about an African anti-colonial freedom fighter leader many years ago. The freedom fighter said:
“When the white men first came - they had the book, we had the land. Now we have the book, the white men have the land.”
No, I am not going to write about colonization or fighting for independence. I missed that boat in the 50s. Born at the wrong time.
But still it stuck in my head…
Let’s apply it to our financial decisions.
We have the cash, and after meeting someone (distant relatives and well-intentioned casual friends are the most dangerous!), did you notice if we are not careful, we often depart with our cash and come away with something the Red American Indians have also discovered after signing peace treaties with the white men:
Words written on water.
You may want to take a moment to pause and reflect.
There are many well-intentioned sermons to part with our cash –especially those that are stroking the inflation fears – that holding cash now is “foolish”.
Before we rush to buy “trinkets” from the snake oil salesmen, you make want to take your own counsel first.
P.S. I have hedged against inflation. The point is not to do nothing; but only act through your own volition. And there lies the key to true financial freedom – taking personal responsibility.
Hi SMOL,
ReplyDeleteI still have cash. I never hedge it. Maybe I should stand and reflect...
Hi SMOL,
ReplyDeleteI think that pple who are eager to use their cash in order not to lose 3-5% due to inflation must be ultra careful. If they are reckless, instead of losing 3-5% from inflation, they could lose 50% from investments/trading, so that's even worse.
I really don't think inflation is that scary. First of all, the stated inflation rate is not your personal rate of inflation. The basket of things used to tabulate the official inflation figure might not be the things that you use. Secondly, if you're not holding cash for yrs and yrs, losing the % due to inflation is perfectly fine. Unless you tell you that you're holding your cash for decades, then we'll see a big dent in your purchasing power. By the rule of 72, a 3% inflation rate (this long term inflation rate should be used instead of the monthly 6% that we see these days), we need 24 yrs before we see that our purchasing power is halved, so why worry if you're not holding cash for decades?
I think holding cash during bearish times is akin to keeping your gun powder dry. A crash without cash is totally useless.
Perhaps a property investment will help hedge against inflation. Also with a property investment, there should also be some cash reserved to cover 6-12 months of mortgage loan.
ReplyDeleteHowever, ideally, this property investment should be able to withstand the bad times when economy is down.
Hi financialray,
ReplyDeleteI think while a property can hedge against inflation, to hedge against inflation by buying a property doesn't seem wise.
I would buy a property for living, for rental, for capital gain, but certainly not because I want to hedge against inflation. Again, it's a matter of timing...can't just go around buying property now because your're afraid that you'll lose 3-5%. With property and that usually comes along with leverage, you can really lose 10-30 yrs of 'inflation' while trying to avoid losing 3-5%.
Hi Jared
ReplyDeleteA rather profound but yet important advice for newbies. Truly, invest your monies in what only you understand. If one doesn't understand the asset class well, one should do some homework to read, ask questions and most importantly, think!
I only learnt about personal finance and the concept of financial freedom from reading, trying out investments and learning from my mistakes and losses as well as reflecting about what was appropriate for me.
To me, my key hedge against inflation is to be invested in the stock market (about 50% of my investible savings are in the market) while the rest are cash and cash equivalents.
The other way to hedge is to always live within my means on an annual basis. :-)
Be well and prosper.
1) Hello OT and financialray,
ReplyDeleteMy puropose in writing this post as a "heads up" alert has already been elucidated by LP perfectly :)
Caution is needed now when most other "traditional" inflation hedges are near their all time highs or valuations "not cheap" - be it gold, Singapore properties (US properties another story!), Swiss franc, STI equities, etc.
Imagine making a rash move and these "traditional" assets CORRECT in the next 6 months due to global headwinds:
1) US economy slowing down
2) European contagion spreads
3) Middle-east political unrest
(Now Israel also!)
4) Asia tightening
Like LP has pointed out. I rather "lose" 5% due to inflation and have cash to take advantage of bargains, if they do present themselves.
Buying properties or stocks at their highs is not hedging. Buying them at the lows makes more sense to me. (That's why I so impressed with AK's sale of his condo recently. Can you imagine the TNT he has now!? Protecting our profits is the best hedge of all!)
It comes back to: have we overpaid just to protect the 5% inflation loss by holding cash as dry powder?
It's too late to buy Swiss franc now as the Swiss govt is now intervening to stop the over valuation of their currency.
Gold I am more optimistic since Korea and Thailand have just bought gold at current prices. Very interesting!
I am more into silver and used it as my hedged against my declining euros 2 years back.
2) Thank you LP!
Hello PG,
ReplyDeleteYou brought up another interesting point!
There is danger in jumping into an asset class we are not familiar with! Even if they may seem "similar".
Experienced retail property investors can be "newbies" when it comes to land-banking. Same same but different!
Yes LP, you are absolutely right.
ReplyDeleteBuying a property is easy but to do well in property investment depends a lot on timing, location and sometimes a little luck and a lot of homework.
Of course, I would not advise anyone to buy a property investment just to hedge against inflation. Unless he already has the intention to hold it long term and knows what to do.
Property investments maybe for the short term, buy and wait for capital gains to sell.
It can also be for long term eg buy a landed and wait for the nest egg to grow.
It can also be for cash flow if your rental shop is fetching a good rent. Similar to having a REIT but being a landlord means more risk. Risk can be minimised though.
Thank you for allowing me to explain, lest someone jumped to the wrong conclusion