Full Transcript

Dr James: 0:46

What’s up everyone? I hope everyone is having a tremendous day, wherever you are in the world. This is just a quick message to say that, if anybody out there knows a dentist who needs to improve their financial literacy, there is a huge backlog of episodes in the Dentist to Invest podcast and I would be immensely grateful if you could share an episode with them that you believe will help them. There will be one in there in the anthology 100%. Also, i would be massively humbled and grateful if you could take two seconds to like and also review this podcast on your podcast platform. That would mean that this podcast gets greater reach and it can impact as many dentists around the world as it possibly can. Thank you so much and I’ll catch you all soon, welcome. Welcome to the Dentist to Invest podcast. There are only really three concepts that you need to understand whenever it comes to investing in traditional assets. What are we talking about when we say traditional assets? Well, for the purposes of this podcast, the definition that we’re going to use is stocks and bonds. Of course, of course. Of course, there are more than that, depending on who you ask, but when I say traditional assets, the reason that I’m referring to traditional assets is because they’re typically the assets in which a financial advisor will invest your money, or if you’re going to use the DIY approach, you’ll probably use these assets to a greater or lesser degree as a component of your portfolio. Stocks and bonds is what I’m referring to, of course. Now, of course, they’re not the only way to invest. Many people have got rich without having a portfolio of stocks and bonds necessarily in it. However, most people nowadays will have at least a component of their portfolios that they’re definitely the mainstream assets that are out there. So, if you have an asset, if you have a general investment account, you’re more than likely going to have some of these assets as constituents of that account. And certainly, if you go to a financial advisor rare as the financial advisor who would stray too far away from the two assets that I’ve just mentioned they’ll be the backbone of your portfolio whenever it’s professionally managed. Now, really, realistically, if you’re going to invest in traditional assets we use that terminology then you can either use professional help, like an IFA or NFA, or however you decide to go about that, or you’ve got the DIY approach where you can do it yourself. Now, either way, it’s really really, really helpful to understand these three market forces, the only three market forces that you really need to grasp in order to understand how you grow your wealth long term when you’re using paper assets or traditional assets. Just another name for traditional assets, in this instance as components of your portfolio, is super, super, super important. So what are those three market forces? The first one is the rate of growth in value of the assets. So that’s got two functions. It’s a function of time, as in how quickly that happens, and it’s also a function of appreciation. It’s also a function of the degree to which that shift in increase in value happens. So, obviously, if an asset was to go up 10% a year versus 20% a year, naturally if everything else remained the same, all other factors were the same, you’d rather have the asset that gives you 20% a year, of course, right. So that would be the rate of appreciation. So it’s measured in percentage. It’s measured as the first component of that is value, and then the second component of that is time, because it has to be relative to something else. So the first thing you need to understand is the rate of appreciation. The second is volatility. So what is volatility? The volatility of an asset is how much it fluctuates in value over a given rate of time. So if there’s higher volatility, what it means is the value of that asset goes up and down in a more rapid rate, or certainly a more precipitous rate. Certainly a higher rate The degree at which it varies is higher than a lower volatility asset which doesn’t fluctuate in value. That much So, for the purposes of us having an easy ride, for the purposes of us having a stress-free investing experience, we should seek to minimize volatility. But actually it’s not the most important thing, because if something appreciates at a great rate but it’s volatile, then lots of us out there, depending on our emotional state, depending on how much we can handle our portfolio, fluctuate in value. then we might choose to have an asset that is more volatile but gives us greater rates of appreciation, because actually, all things said and done, in the long term, really we just want our wealth to grow at the greatest rate possible And for anybody who knows how compounding works, 2% or 3% increase in the rate of appreciation actually adds up to a huge amount over time. I can put that in tangible terms for you $10,000 or £10,000, whichever unit of currency you want to use which is appreciating at a rate of 9% over the course of 40 years will give you 300,000 pn. $10,000 appreciating at a rate of 10% over the course of 40 years will give you $450,000. So there’s actually a huge increase there. That’s more than 50% more money. That’s a massive, massive, massive amount. And obviously if we start investing we’re 25, retire when we’re 65, then a typical investment career might be around 40 years. Hopefully it’ll be a little shorter because you get to retire earlier, but you can see how much it adds up. So really we want to maximize rate of appreciation. We also want to minimize volatility. But where the maximum rate of appreciation necessitates a little bit of volatility, we’re happy to let the rate of appreciation take. President, now that makes total sense. But most people don’t do that in their investment portfolios, as you’ll see in just a second. So third factor we need to consider is inflation. So what is inflation? Inflation is the rate of depreciation of cash. So if you have cash, if you have $10,000 in the bank account and the rate of inflation is 10%, then what that means is that that $10,000 in one year’s time, or 10,000 pn, whatever you want to use can only buy 9,000 pn worth of stuff. So for all intensive purposes, it’s only worth 9,000 pn compared to the initial value of the $10,000 that you put into the account. Now, here’s the thing. Here’s the interesting thing, right, that process has happened continuously with time, so we need to protect ourselves against that. Whenever we store our wealth as cash, our portfolio is subject to that effect. Our wealth is being continuously eroded by the effect it’s known as inflation. Now, how that works, we need to do another podcast on that at some point. It’s actually really interesting and there’s really in depth reason why that works, but suffice to say before today it does occur. So here’s the thing If your assets are appreciating at a rate of 10% a year And inflation is typically about 3% a year, and actually you’re only really making 7% profit every single year in real terms, so that 10% looks way better on paper than what it actually is. Now, if inflation is 9% on our assets that are appreciating the rate of 10%, we’re only actually making 1% profit every year. We’re just barely doggy paddling and staying on top of inflation. We’re treading water. We’re just about keeping our head above water. Even worse, when the assets only really give us a rate of appreciation of about 3% or 4% which there are lots of assets out there that do, ie the bond market. Long term, we’re not actually beating inflation. We’re actually staying just below where we need to be in order to beat inflation. We’re still losing money. We’re just losing less money. But here’s the thing most people are investing in assets like bonds because, well, really, we think to ourselves hmm, actually, i don’t want volatility, i want a smooth ride. I don’t want this to be difficult, i don’t want this to be hard, i just want this to be easy. But at the same time, i’m not actually really making any money. So wouldn’t it be better to accept a little bit of volatility in the instances where we are going to make some money, in the instance where we can actually grow our portfolio, in the instance where we can actually accumulate wealth, because that is the whole entire point of our investment? It’s self-sabotaging to not understand that concept Really, if you take your emotional proclivities out of it. Most people just want to have the easy ride, but, like I said, it’s not. You’re not actually getting anywhere right. So whenever you understand that there’s only really three market forces that you need to consider, then you’ll understand that there’s not a fourth one in there. The fourth one in there that everybody puts in, which is emotional comfort, which is not wanting to witness their account fluctuate in value to huge degrees. So, whenever you understand that, what it means is that you can actually distill that down to the fundamentals, the three things that you actually only need to consider, and those are the rate of appreciation, volatility and also the rate of inflation. So the whole idea is is for you to have assets that appreciate at the greatest rate possible and outpace inflation by as much as possible can. But you can’t actually control inflation. Inflation just is. It’s going to be there at all times, right? Inflation is a function of how much cash is being printed is one of the factors how much cash being printed by the government. Now, that’s not something that we can control, but what we can control is the rate of return on our investment through educating ourselves and understanding how investment works. Now, how does this link to our investment portfolios? If our timeframe is very long, then what will typically happen is we will have a portfolio that is more heavily weighted in stocks. The reason why we have more heavily weighted our portfolio in stocks or portfolio of traditional assets, is because we want a greater rate of appreciation. We want to be able to beat inflation by as much possible And we know that if we can get a 7% net rate of return, rate of appreciation deducted from rate of inflation 7% net that that actually makes a huge difference versus a 4% rate of return portfolio or a 3% or a 2% once inflation is deducted, because over a huge amount of time 20, 30 years that actually is a difference between having a six-figure portfolio and a seven-figure portfolio. Potentially It makes a massive, massive, massive difference. Or because we took the time to educate ourselves on how investment works and we understood that there’s only three forces, the three forces that are mentioned right. When we peel back the layers and we look at it wholly and objectively, our emotions shouldn’t really be a factor, even though we let them determine our investing all the time. That one little tidbit will make you literally millions. Obviously, that’s not all there is to investing in paper assets. Obviously, that’s not all there is to investing in traditional assets, but it’s a huge flip-in mindset flip. It’s a huge step or leap of progress on the pathway to beginning to understand how you can grow your wealth the greatest rate possible. Of course, there’s a little bit more to it. I wouldn’t just go and rush into the stock market off the back of that. There’s more to your understanding just how precisely that is done, but it’s a huge step forward, like I said. So remember only three factors that you need to understand literally only three, whenever it comes to paper assets rate of appreciation, volatility, rate of inflation. Greatest rate of appreciation in assets. You’re seeking to achieve the greatest rate of appreciation in assets that are proven to give that record over a long period of time. So there’s two operative things in that sentence the rate of appreciation has to be as great as possible, but also they have to be proven. You have to know that they work. How do you do that? read up on how the stock market works. There’s some really cool, interesting things in there. I’ll do some further content on that a little further down the line as well. Volatility volatility is only really a consideration if we are getting close To the time where we seek to begin to sell our assets in order to generate some cash flow, in which case We can’t over expose ourselves to volatility. But I’m a very long term time frame maybe 10 years plus because we’re not actually going to sell those assets anytime soon. We don’t actually really care if the ride goes up and down. We don’t care of the roller coasters bumpy. All we really care about is that the roller coaster is continuously going up and climbing at the greatest rate that it possibly can. Third thing we need to consider rate of inflation. Really, you can’t control this, really can’t change this, but what you do need to seek to do is outpace the rate of inflation by the greatest rate that you possibly can in order to Ensure that you’re actually gaining wealth. If you’ve got a long-term portfolio, it is overly weighted into bonds. You’re not actually going to be making any money. You’re just going to be offsetting or mitigating the impact of inflation on your wealth, and that’s about it. The more you know. If you enjoyed this podcast, please hit, follow or subscribe so you can stay up to date with information on new podcasts Which are released weekly. Please also feel free to leave a positive review so others can learn about this podcast and benefit from it. 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