Beat inflation with wealth creation

In order to create and preserve wealth, you need to do two things.

1. Get your capital to work for you and
2. Make sure you aren’t risking that capital by putting it to work.

Warren buffet defines risk quite simply as the potential to permanently lose capital. When doing an analysis of a potential investment, the very first questions the financial advisor will ask you will be directly related to your “risk-profile”.  Essentially, the financial advisor is trying to find out how you would cope losing your money.  This implies that there is an inherent risk in any managed portfolio of investments for you to lose part of or all of your money.  And, on top off that little punch in the gut, the financial advisor is there to take your money for managing that portfolio.  So, he has no risk. He gets paid, regardless of whether you make money out of the investment or not.

Where does that leave you?  You have worked hard to accumulate a fairly good sized amount of capital and you know it is time for your capital to start working for you, but where do you start?  Ultimately, you need to take responsibility for your money, and handing the responsibility over to a financial advisor, stock broker or financial institution will never make you wealthy.  The minute they have control of your money, who do you think makes the money?  I’ll give you a hint – it’s not you.

Let me explain a bit further.  Inflation eats your capital. If you are not working that capital at a rate to beat inflation, you are losing money, each and every day. The rate of inflation is the percentage of money you’ll need more of every year, to buy the same things you were able to buy the previous year. It’s the percentage by which the value of money decreases per year. So, by this definition, if you have R1million capital sitting under your bed doing nothing, at an inflation rate of 8%, at the end the first year, your R1million would, effectively, be worth only R920 000, and at the end of 5 years, it would only be worth R659 000.  So if you do nothing with your money, you would lose over R340 000 if the inflation rate averaged out at 8% per year for those 5 years.

So how do you invest to beat inflation and avert risk? This is the age-old question.  The standard answer by any financial advisor worth his salt is that you can’t.  Their rule-of-thumb, and you’ve probably heard it before, is “the higher the risk, the greater the reward”.  This is absolute rubbish.  You can achieve great results and invest your capital with no risk at all, but it takes some responsibility on your part.