FP Article 4
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Public Enemy Number 1
by Rajen Devadason
Inflation is taxation without legislation.
Runaway fuel and food prices are
causing people around the world to
relook their basic expenditure
If you've been
bemoaning the terrible effects
recent inflationary pressures have
had upon your life and upon your
family's capacity to fund future
dreams, then you may want to keep
reading this article to learn a
little bit more about the dangers of
playing it too safe in the
short-term and thus exposing
yourself to extreme economic
shortages over the long haul!
To set the stage, please allow me to paint a
word picture for you that, sadly, might seem all
A regular guy,
whom we'll name Alan, was a person who
wanted to play it safe. While conservatism
has its place in many areas of life, in this
instance, Alan's 'cowardice' cost him dearly.
This is an article on why we all
need to guard against inflation's
insidious bite. I hope
you enjoy reading it. But if it isn't what
you're looking for, you're welcome
to search for something that better meets
your needs. Thank you for allowing
me to serve you.
cowardice-driven conservatism did
NOT cost him his physical life, it did cost him his
long-term economic life - meaning his financial wellbeing
- because soon after the onset of his retirement,
ran out too quickly.
contributed to this sad state:
1. Alan's natural
conservatism caused him to park his savings in
instruments that were safe but which yielded
very low returns.
portfolio growth over the decades.
inflation eroded the buying power of the small
stash he did manage to set aside.
Result: The cost of basic
necessities spiraled out of control, thus
accelerating the rate Alan 'devoured' his funds.
We all know people like Alan who shudder at
the thought of taking any kind of risk with
money. Because of that, as explained, they tend to keep all
of what little they can save in safe, but
dismally yielding instruments.
There is a place for capital preservation, but
take note of a powerful relationship at work
over the long haul that rewards intelligent
investment risk-taking and penalises those
who play it too safe.
It's called the risk-reward relationship, and is
cornerstone of modern investment science.
Without going into mind-numbing
mathematical formulae, let me just define it
The risk-reward relationship essentially states
the more investment risk you are willing to
stomach, the greater the eventual monetary
reward you should be able to expect over the
In normal, day-to-day English usage, the word 'risk' when
associated with money sunk into some
investment or savings vehicle means the
danger of not getting it back when you need it.
But to investment professionals, the word 'risk'
has a subtly different meaning. The relative 'riskiness' of an asset is reflected by its
volatility, especially over the short- and
The problem therefore with super-safe
investments or savings instruments, such as
the bank deposits Alan and his cohorts or
likeminded friends favour
to the exclusion of all else, is that these
instruments tend often to generate
compounded growth rates that are lower than
If you park $100 in a bank account that yields
2%, but inflation rages around you at 3%, you
will lose ground to the tune of one percentage
point per year. And imagine if your personal
inflation rate is double the official rate, then
in your own life, you will be losing your battle
against inflation at the staggering rate of
percentage points each year. (Explanation:
If your personal inflation rate is 6%, say, and
your money in savings is growing at 2%, then 6%
minus 2% equals 4% a year.)
Continue to do this long
enough and you could end up in the poor
house. Which is what I meant earlier in saying Alan received his just
desserts for cowardly behaviour.
Alan played it too safe, and it cost him dearly.
But that doesn't mean
conservatism is bad! Exercised correctly, it is
good. For instance, the world's greatest stock picker is generally
regarded to be Warren Buffett, at the time of
this rewriting the world's richest man.
In the world of high finance, Buffett's
value investing approach is deemed pretty
conservative by others who prefer racier
stems from great intelligence, great discipline
and a great commitment to learning. (If you too
would like to commit - only to yourself - to a
long-term programme of enhancing your ability to
understand investing, financial planning and
economics, help yourself to my free ebook,
26 Books To Take YOU All The Way To The Top!)
Buffett once wrote, "The arithmetic makes it
plain that inflation is a far more devastating
tax than anything that has been enacted by
our legislature. The inflation tax has a
fantastic ability to simply consume capital. It
makes no difference to a widow with her
savings in a 5 percent passbook account
whether she pays 100 percent income tax on
her interest income during a period of zero
inflation, or pays no income tax during years
of 5 percent inflation. Either way, she is
in a manner that leaves her no real income
whatsoever. Any money she spends comes right out
economist Milton Friedman puts it even more
succinctly, "Inflation is taxation without
As far as you and
I are concerned, the bottomline is that in the game of
investing, taking the trouble to learn about the
science and art of growing your money is the
best way to work on enhancing your investing
inclination over the course of several years.
As you do that, you will be laying a solid
foundation for long-term financial success
because investment success is correlated to
intelligently derived investing inclination.
People like Alan tend to find themselves
retired and poor because, at the end of the
day, not taking any risk at all is the greatest
risk of all!
However, the solution is NOT to
dive headlong into investing your precious,
hard-earned money without forethought. No! The
solution is to take time to learn how to save
your money more aggressively and at the same
time invest time, effort and mental focus on
learning about the various forms of investment
risk. To help you with both goals, read these
two articles, which I've written for you:
How to Start Saving Money
Investment Risk -
Understanding and Profiting From It!
Finally, if you live in Malaysia
or are a Malaysian expatriate working elsewhere
but are eventually planning to return to
Malaysia and think you might like my help in the realm of financial
planning and retirement planning, you may learn
more about me
© Rajen Devadason