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  • Tom Grady

it's all relative

There are few absolutes in life, least of all in investing. An investors job is to find the best option available to them at any particular time. The merits of each option will change over time and frequently need to be re-evaluated. The main options most people consider today for their income are;


1) Spend - enjoy the fruit of your labour today and buy something which you consumer almost immediately.


2) Keep cash - At the moment you will likely be losing c2% per year in purchasing power by keeping your savings in cash because interest rates are near zero whilst inflation is at 2% to 3%.


3) Invest in bonds - bonds are simply debts issued by companies which you can buy on the open market. Buying investment grade bonds today may give you a return of c2% to maturity and therefore may generate just enough return to offset inflation provided there is no large scale defaults.


4) Invest in equities - there is a wide spread of risk and potential return within the equity universe but if we look at the S&P500 for each $100 invested you will be entitled to $6 of earnings. This is a yield of 6%. With equities however you also get growth. Over the last 20 years earnings for companies within the S&P500 index has grown by c7% per year. This is (very roughly) additive to your returns on current earnings so the 6% return you get on today's earnings plus the assumed 7% growth in earnings means you have a potential return of 13%. The risk with equities however is that you frequently have periods of significant price declines. The S&P declined by almost 50% between the middle of 2007 and early 2009 and didn't recover to previous highs until 2013.



Which one of these options are best? All of them, for different purposes. I keep 12 months of living expenses in cash (for liquidity), and the rest in a varying proportion of bond funds, equity funds and specific stocks.

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