Dr James: 0:47
Hey to you, welcome back to the Denton’s Invest podcast. Today we’re going to talk about four ways that you can beat inflation. These are not the definitive four ways that you can beat inflation. There are many more, but here are four of the most useful and practical ways. Some of them are ways that are a little unusual or things that you might necessarily think are actually linked to beating inflation, but, of course, the whole point of the Denton’s Invest podcast is to get you to see the world with a different pair of eyes, understand the vital knowledge that I’m about to give you in just a moment and be able to use it and apply it to your life and see things from another perspective, because that is, of course, massively important. So let’s talk about what inflation is. First of all, let’s break it down into really really, really simple terms. Inflation is the rate of depreciation of the value of your cash. So let’s put that into real terms, terms we can understand. Let’s use Fredo bars as a means to understand inflation, a means to communicate this information. So, if I have 100 Fredo bars and once upon a time Fredo bars are 10p, but now I think they’re like 50, 60p, something like that, but anyway, let’s round that up to a pound, just for simplicity, just for understanding, just so that we can use really simple mass to get this point across. So if I have 100 Fredo bars and each one of those Fredo bars is one pound, then it’ll cost me 100 pounds to purchase all of those Fredo bars. So if my cash became worth 10% less it depreciated in value by 10%, then all of a sudden my 100 pounds would buy me by 90-ish Fredo bars. To flip it on its head, it would cost me 110 pounds now roughly in and around that, not precisely, but in and around that 110 pounds to purchase 100 Fredo bars. And that’s because the rate the cash is depreciated in value, which means I need more cash to purchase the same amount of Fredo bars, because they’ve lost their party at one to one and now the party is more like one Fredo bar is one pound, 10, something like that. And what that means is that cash has, the cash has depreciated in value. Now here’s the thing we can replace Fredo bars with literally anything on the face of this earth, and that effect is constantly happening at all times. Our cash is constantly depreciating in value. And how does that manifest in real life? It takes more of our tokens, it takes more of our cash to purchase the same item that we’ve been continuously buying over time. Because it takes more of our tokens to purchase that same item, what happens is price goes up and before inflation is said to be occurring. Now we can see this every single day in the shops. You go into the shops, most things go up in price over time and this effect has been continuous ever since the beginning of fiat money, which, depending on what you call the beginning of that era but most people quote 1914, certainly the current era anyway. Then you will notice that that effect has been continuous ever since that period, ever since that time, ever since that year. And the rate of inflation average rate of inflation is said to be 3% year on year. At the minute we’re living in high inflation times because it’s like 10% 3% is average and we’re currently in 10%. That is pretty damn flipping high. So we need to know how we can either utilize inflation to be our friend and investing, because that is possible, or we can just at least it’s impact on our investing, on our wealth, because it is the silent killer. It is the thing that is constantly depreciating the wealth that we have worked so hard to accumulate. We need to know how to protect ourselves against it. Remember, investing is a defensive thing first, before it’s an active thing. You’re just simply protecting the wealth that you already have by storing it in a different form. I used to think that investing was this aggressive thing. We go out in the world, we’re doing these hot trades, we’re learning about this hot crypto, we’re sticking our money into it, we’re monitoring the charts, we’re watching it go up and down. We’re spending a lot of time doing that. Actually, that is a very aggressive style of investing, Whereas, first of all, we should master the defensive stuff, which is to simply protect what we’ve already accumulated. Remember that if we don’t do anything, then inflation is constantly gnawing at our wealth. We have to do something in order to protect ourselves. We have to take an active step. If we don’t do anything, most people think not doing anything is a safe thing. Actually, it’s one of the least safe things that you can do Because, as I say, your wealth is being constantly gnawed away by this effect called inflation. We’ve got to know how to protect ourselves against it. Like I say in a nutshell, inflation is the name for the phenomenon which causes the cash in your bank account to depreciate in real value with time. Therefore, consequently, you need more and more and more of it to buy the same amount of federal bars, to buy the same amount of flipping chocolate buttons, the same amount of crunchies. It’s not just limited to chocolate bars. I’m talking about cars, we’re talking about houses, we’re talking about plants at the garden center. We’re talking about flipping everything on the face of the earth. So how do we, as I say, ensure that the real value of our wealth doesn’t depreciate with time? Well, here are four ways that you can use to beat it. So, first of all, of course, investing in assets, but we’re going to talk about specifically paper assets this time. So, paper assets pretty long winded explanation as to why paper assets are called paper assets, which we won’t get into, but suffice to say that we’re just going to talk about stocks and bonds for today’s podcast. So here’s the thing. Here’s a mistake that I see people make all the time they don’t factor in the rate of inflation into their investing returns. Because if I make an investment and it’s appreciating a rate of 5% a year, but inflation is 10%, I’m not actually making any money, I’m just mitigating the effect of inflation, I’m not actually having any real positive overall cumulative effect on my wealth. It’s not actually going to make me wealth long term. I need to understand that the rate of appreciation on my assets comes before the inflation is minus from that sum, is deducted from that sum and then after that is the real return. The result of that mathematical equation is the real return of my portfolio. So if my rate of appreciation is 10% and inflation is 3% which it typically is, we’re on about a 3% mark then my real net worth appreciates by 7% every single year. But it looks a lot better on paper than that because the effect will be 10% overall, but in reality only 7% is the net gain that I am making every single time. And we need to understand that. Because here’s the thing we look at the bond market year on year. The bond markets year on year return, if we go way back in time, is like 3%, 4%. But if the rate of inflation is like 3% as well, we’re not actually really net making that much money. Now here’s the thing if we’re only really net making 1% every year, 1% compounding doesn’t actually compound to that much over a long period of time. So we need to look at the assets that it’s going to give us the biggest return. But it’s also safe and proven and demonstrated over a long period of time to give consistent rates of return. And those people say that this is the stock market whenever we take out all other factors that usually come into play whenever it comes from investing, such as emotional factors. Now here’s the thing it’s not just buying any old stock, it’s not just buying any old index, it’s not just buying any old fund. You have to buy very particular ones and you also have to know what you’re doing, because volatility is a factor as well. There’s only really three things that you need to consider whenever you’re investing in rate of appreciation, as in how much is the asset going in value over time. The rate of inflation, which is the amount that inflation is impinging upon those returns. So if the rate of appreciation is 10%, rate of inflation is 3%, then you’ve obviously got to deduct that from the rate of appreciation to find your true rate of returns. Then you also have to factor in volatility as well, because volatility is like the pendulum that swings back and forth around the true value of the asset, the present true value of the asset. So obviously the rate of appreciation might be 10%. But if volatility is something that is impinging currently a lot on your portfolio and you see it fluctuating up and down, then even though if you just sit back and observe the portfolio growing in value and that might be true over long periods of time if right here, right now, volatility has caused it to go down, then naturally you’re going to sell at a loss, regardless of any average rates of appreciation and average rates of inflation. So you need to A minimize how much volatility affects your assets, which is nigh on impossible to do. You have to accept it to some degree or B have a long enough time frame over which you’re performing your investing so that it doesn’t actually make any difference if it fluctuates up and down in the short term. But these are things that we need to understand. There’s only really three things, really three factors, whenever it comes to investing rate of appreciation, rate of inflation and volatility. You can master those three things and understand that volatility is just part of the journey. When you’ve purchased the correct asset, then you can purchase things which will give you way better rates of appreciation and therefore outpace inflation by much more and therefore accelerate your journey to financial freedom, got to understand that stuff. But, again, not everybody likes to watch their portfolio go up and down in a crazy fashion because of volatility, and hence why they tend to purchase less volatile assets which have lower rates of appreciation, which ultimately impede that journey to financial freedom. But, like I say, of course, dyor, please, please, please, please, please, don’t just jump into the stock market. Get some level of education, get some level of understanding, and what it means is that you can take advantage of that knowledge and accelerate your journey to financial freedom, which is what this all is about. So, like I say, way number one, the most common way, the way that people always talk about, is to go ahead and invest in some paper assets. Usually, people go to the stock market, but of course, you can’t just buy any old stock, you can’t just buy any old fund. You need to know what you’re doing. So please, please, please. If you don’t feel comfortable doing that on your own, please get some financial advice. Or the alternative is the DIY approach, where you educate yourself and then what it means is that you keep all of the profits rather than having to pay someone else to do it, which actually makes a huge difference in terms of rate of appreciation of your portfolio. It makes a huge difference in terms of how soon you can retire if you know what you’re doing. Obviously, the DIY approach, when executed properly, will mean that your retirement date pulled forwards towards the present. It happened sooner, many years, sooner five years, 10 years, depending on how comfortable and competent you are undertaking that practice. So method number two property. That’s the second way to beat inflation. So how does property beat inflation? It beats in two ways. First of all, the house that you’ve purchased will appreciate and value generally. At least that’s what the trend has been over hunt over, however many decades. Obviously you have to look at individual factors in the property itself. Not just every property will do that, but buying laws of property market does go up in values, so there will be some appreciation there. The second reason is that because obviously with the property there’ll be some cash flow if it’s a rental property and naturally that rental yield will go up, well, the rental yield will remain about the same, but the rent itself will go up over time. Because rents go up. They’ll go up to match inflation so that you can maintain your profit margin. So here’s the thing. That’s an inflation bust and investment on two levels because, like I say, the asset itself is appreciating, even though the amount that you exchanged for it will always be constant, because that was a one time transaction that happened at a point in time. It can’t be more, it can’t be less, it can’t go up or down, but the rate of the appreciation of the house is continuous. It usually does go up over time. Therefore, you will appreciate your wealth and bust. Inflation plus the cash flow that comes in will naturally go up over time as well, and this is why so many people see houses and property as an amazing retirement investment, because you’ll always have cash flow if you have properties. But of course, you have to be really wary about that, because I’ve just made it really really really simple. There’s obviously more to it, but in principle that’s how it can be used. There’s even a triple whammy on that as well. If you borrow £100,000 for a house, then you only ever have to pay back the £100,000 plus interest. There’ll be a little bit of interest, but if the interest rate is much lower than inflation, then actually you’re making a profit there as well, because if you’ve borrowed £100,000 and paying the £100,000 back plus 1% interest, but the rate of inflation is 10%, then really actually the real value of that money every single year depreciates by 9%. Therefore, that was actually a pretty smart investment, because you’re actually getting paid at both ends. The value of the money is going down plus, as well as that, the rate of inflation is much higher than the rate of the interest and the interest rate, and so what that means for you is that actually you’re winning on both sides. Third way to beat inflation is to have a business. Businesses are one of the most amazing inflation-busting assets, because what can happen? The income into the business, you can put your prices up. Of course, it’s not just as simple as that. You have to consider a few other factors, but you can put your prices up to match inflation. And here’s the thing Businesses have to be done to a degree to maintain the business and therefore what it means is that you can always have cash flow which is at or above the rate of inflation. But of course, you just have to do that in a delicate way, and it obviously varies based on the nature of the work that you do, the nature of the business that you own. Some industries in some sectors are a lot more price sensitive than others. I think, by and large, in dentistry, we have scope to increase the investment of our treatments when we can justify the value to the patient and then therefore keep abreast or even up pace inflation by significant amounts. Really, really, really cool thing to remember. Plus, the business if it is a proper business and not just some sort of company in which you work, you’ve actually fully extracted yourself from the company in which you work because you own the company itself rather than just working in the thing that you own. You’ve actually taken yourself out of it. You own it. Other people work within the business and you’re the person who owns it overall. Then what it means is that you can sell that on to someone else. What happens to the value of a business? Every single year, it goes up and up and up. Usually it outpaces inflation most of the time not always, but most of the time and here’s the thing if that’s how it pays in inflation as well, then you have amazing cash flow that outpaces inflation. Plus, you’ve got an asset in which your money is stored that is also outpacing inflation, which is flipping awesome, and that’s the cool thing about dental practices. One way to outpace inflation is to upgrade your skills. A skilled person will always be able to ask for a level of remuneration that fairly reflects the value of what they’re giving someone else, but fairly reflects the value of what they’re giving their patients. If we take the example of a dentist Providing you upskill and you continuously upskill, then you’ll always outpace inflation because your skills will always have value, even if you lost all of your money tomorrow. If you’ve got a really highly remunerated skill, highly monetizable skill, then you can earn that money back pretty fast. That’s the difference between somebody who is able to generate quick, great wealth fast and somebody who is not able to do that. It’s probably their skill set and that works for dentists, but also people in other industries as well, because if you have those skills, you can always, always, always, always, always generate cash flow, even if you lose everything very fast. You don’t want that to happen, of course, because that’s your safety net, but you can recover much easier than someone else who’s not able to generate as much cash flow as quickly as you. Now here’s the thing that process is continuous. There’s actually no cap on the amount of value that you can give someone. Therefore, there’s no cap on the level of remuneration that you can ask for in return, and the cool thing about that is it can outpace inflation by flipping huge amount. We just have to invest in our skills and knowledge, and what that means is that you can always stay abreast of that phenomenon. Four ways to be in inflation not the only four ways, but definitely four of the coolest ways that I’ve found. Everybody thinks that we have to invest in paper assets in order to overcome it. Actually, if we extract ourselves from that one-dimensional perception of how inflation works, then what it means is we can appreciate there’s more ways to overcome that phenomenon and also make it work for us, which is flipping awesome.