Here’s two 5 cent coins sitting on my table.
Yup, I’ve gotten it out from my coin purse — one is a 1995 and the other a 2018 edition.
I can give it if you want, but I don’t think you will.
I’ll share why I’m still keeping this 5 cent coins with you in a bit.
Now we’ve all heard horror stories…
I know you’re worried. This is a genuine concern.
It takes years to build a nest egg that will last you through retirement.
I’m not talking about a market crash, or a crisis.
But something more insidious.
The biggest concern for any Singapore stock investor
The biggest concern for any retirees and any stock investor is the looming threat of inflation.
And I know the thought of outliving your money has kept you up at night.
You’re wondering if your nest egg truly allows you to retire.
Or, maybe years after you’ve retired, you find you’ve run out of money and forced back to work…
But inflation is also a pirate that robs the purchasing power of your money.
It’s dangerous if you don’t do something about your money.
Imagine this: your healthcare becomes more expensive, your housing costs, the food and even weekly groceries are expensive.
Once, I got scolded by a hawker stall auntie boss. It was lunch — the stall was busy the queue was long.
I was scrambling to use the loose change in my coin purse to pay for my kway teow soup.
And I passed her my 5 cent coins.
And she scolded me for it.
“I’ve no use for these coins! Don’t give them to me.” she said.
I had no choice but to hold on to these coins in my coin purse.
Have you ever been caught in this situation?
These days, no businesses want to accept 5 cent coins anymore.
I bet you also won’t feel like accepting 5 cent coins.
You know why?
These 5 cent coins are “worthless”.
As the stuff we buy gets more expensive, these 5 cent coins will lose their purchasing power.
Very soon, it will be 10 cent coins, then our 20 cent coins.
You can’t see it, but it’s there — inflation.
A dollar won’t buy as much as it used to before a rise in inflation.
And that means, you run the risk of outliving you your money.
It’s scary to think of it.
And it’s perfectly normal.
Who wants to worry about money when we should all be planning for our retirement holiday trips.
Take for example, if you’ve saved S$1 million for retirement.
And you expect to spend S$50,000 on expenses and trips.
Say you earn 1.6% investing your nest egg in a 10-year Singapore government bond.
Now what if inflation grows more than 1.6%, to 3%, 5% or even 7%?
In this scenario, your S$1 million you’ve saved could worth much less than it was before.
That you need to increase your S$50,000 to continue living the life you desire for retirement.
Your retirement solution ‘hiding’ in plain sight
That’s why, it’s important to start investing as early as possible.
By accumulating your wealth, you allow your money to compound faster than inflation.
According to Jeremy Siegel, a famous finance professor from the Wharton School, he said: “The history is that stocks more than compensate for inflation and there’s a lot of dividend paying stocks — 2%, 3%, 4% 5%… and that’s what I think is going to continue to drive (put) the money into the market despite the fears that the Fed will tighten in the future.”
Even Warren Buffett agrees to stay in stocks.
In the early 1960s to 70s, Buffett continued to devote a huge portion of Berkshire Hathaway’s cash into stocks — despite the high inflation in the U.S.
And his investment firm thrived even when inflation was 12% and housing loans went up as high as 20%.
Listen to this: buying stocks is, in fact a hedge against inflation.
But what you want to be doing is pick companies that can raise prices alongside inflation.
What’s more, these companies can handle a lot more business without having to invest more money to produce profits.
These companies must generate a lot of free cash flow.
You see, inflation picks up because the economy is growing.
Inflation is a sign of a growing economy
There’s more people buying stuff because they feel wealthier and businesses grow.
But the high-quality businesses can produce a far larger profit by riding on a rising economy.
This gives investors a bigger margin of safety.
And that’s because these companies have a durable competitive advantage.
And as a result, share price grows. Your dividend grows.
To retire safely, buy ‘elite’ businesses that can compound your wealth in the long run.
People say stocks are expensive today, and you might hesitate to put money into the market.
But where else can you put your money?
Bank savings rate is a mere 0.3%.
A 10-year Singapore government bond is 1.6%.
It’s a troubling time.
Whether you like it or not, inflation is going to be a real concern, especially for your retirement.
And just like the 5 cent coin, you money can lose its purchasing power over time.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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