Get Rich Slowly

Get rich slowly

You can get rich slowly without much risk of losing money if you have the capital to invest initially, a well-diversified portfolio of real assets and patience.
Alternatively, you get gradually poorer.

There is an undeniable link between the term of an investment and the way risk can affect you.

If you leave money in the bank, building society or other cash-based savings plan for longer than 5 years, you risk not being able to buy as much with it later as you could have bought today. Inflation causes prices to go up and the interest rate on savings does not compete with inflation over the long term. Today you can get around 1.5% interest on savings and inflation is 2%. The gap varies but it will always be the case that cash devalues against inflation over the longer term. Example – you can buy an annual season ticket to travel by train from Canterbury to London for £5,628 today. In 5 years time, assuming 2% inflation, it will cost £6,214.

If you put the same amount in the bank/building society and got 1.5% interest, you would have £6,063 toward the price of the ticket, but that will be £151 short. Your money lost its buying power.

Cost of train ticket over 5 years

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Cost of Train Ticket
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Inflation
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Cost of Train Ticket after 5 Years

Interest in a bank/building society over 5 years

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Amount in the bank/building society
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Inflation
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Funds after 5 Years
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Shortfall

If you invest in “real” assets you are looking for a “real” return. This is a “real” return of value above inflation. In other words, it will buy more, even though prices have risen, in the future. The downside to “real” assets is they change value regularly and although the trend is upward over a long term, they can be worth less than you invested in the early years.

Generally, the rules are:

  • If you have no need to spend the money in the next 5 years, it shouldn’t be in the bank/building society.

  • If you might need it in the next 5 years, it should not be invested

Once you work out what needs to be invested for the long haul and real returns, you then need to consider when you may need to spend the investment. If the money is for a house deposit or university fees, it is likely to be needed sooner than your retirement fund.

If we look back over the last 20 years, some riskier portfolios with target returns of 8 or 9%, against inflation of 3 or 4% (a real return 5%), fell drastically at one point and took 10 to 12 years to recover, let alone make any money.

The more moderate portfolios aiming at 2 or 3% real return took 6 or 7 years to recover from the same market crash.

You can see there is a relationship between the target return, the recovery time and the term of the investment.

I grant you it isn’t simple to work out how best to manage your resources to achieve the optimum result, but you can grow your assets quite predictably with the right help.

If you’d like to find out how Pentins Financial Planners can help you get the most out of your assets, why not give us a call on 01227 931531

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