Work versus family is the most obvious one, and with the AFL starting again, there’s a return of that timeless dilemma – mowing the lawns versus watching the football!
Investing also requires trade-offs, with the most common being the trade-off between the demands of capital preservation and the preservation of purchasing power.
While one may allow a better night’s sleep, the other attempts to provide a more comfortable bed in the future.
Essentially, it’s the old ‘risk versus reward’ trade-off.
Some investors consider risk to be volatility, while others consider inflation as a risk that will eventually erode their standard of living.
Unfortunately, most people don’t have a well defined attitude to risk – expecting long-term preservation of purchasing power, in addition to short-term preservation of capital.
Equity investing requires an acceptance of price fluctuations, which may mean a short-term impact on your capital.
If we look back over the longer term when reviewing Australian equities (1900-2010), the pre-tax annualised returns are 11.6% against an inflation figure of 3.9%.
While recent years certainly haven’t proved as lucrative, it’s important to keep those longer term figures in mind, especially when making investment strategy decisions.
Last week I discussed the flight to safety which has weary equity investors fleeing to term deposits; a strategy, that when measured against inflation and tax, can itself provide a negative return.
Unfortunately for those chasing safety, the equity markets decided upon a rebound just as billions in cash sat in savings accounts and term deposits.
The ASX All Ordinaries capped off the first quarter of 2012 with an impressive gain of nearly 8%.
And while we can’t expect that same return over each of the next three quarters, we should use it as a reminder.
If we consistently second guess our strategies, we might find ourselves with both a short-term loss of capital and a long term loss of purchasing power.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
