Most of you will have heard of Warren Buffett, one of the world’s richest men, and a very respected and seasoned investor. He’s usually worth listening to and I read some exerpts from his annual letter to investors in his company, Berkshire Hathaway. The original article can be found here. You cannot turn your back on the stockmarket because of a fear of losing money because the fiipside is that you will lose money to inflation. If you had invested £100 in 1950 to the present day here’s how it would look:
- Had you invested in the UK Building Society Index it would be worth £1562
- Inflation over this period was £2809
- Invested in a broad mix of equities with the dividends reinvested your £100 would now be worth £113,496 (Source: Barclays Capital)
Yes you read that right.
£113,496 vs £1562
And building societies are low risk? You need to understand the huge negative impact of inflation:
Buffett says, “”In the US, the dollar has fallen a staggering 86 per cent in value since 1965,” he explained. “It takes no less than $7 today to buy what $1 did at that time… Consequently, a tax-free institution would have needed 4.3 per cent interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as income.”
Like many other investors, Buffett believes that gold is a potential bubble. It has soared in value over the past ten years but will never pay you a dividend – if you hold physical gold you can look at it and touch it but it’s fairly useless and incapable of producing anything whereas companies can earn and produce a return on your investment.
The risk of losing capital cannot be viewed purely in terms of will my £100,000 potentially be worth less in five years? Earning a couple of percent interest on deposit will mean that the capital may well still be intact in years to come but inflation will have eaten into what your capital is really worth.
Feel free to give us a call and we can chat about your own circumstances and tailor an investment strategy that will work for you.
With thanks to Anthony Luzio, Reporter, FE Trustnet.
By David Gibson