As New Accumulators, we need to understand that when we invest, we are converting our cash into assets which we hope will increase in value over time, so we can beat inflation and meet our financial goals. But we need to understand what those assets are, and what it is we’re buying as investors so that we know what we’re getting into.
The term ‘real assets’ can be a bit misleading. It obviously applies when it comes to gold or property, because we can see and feel gold and even step inside a property. But shares and bonds are just as real, even if our experience of them is numbers on a statement or valuation screen.
The Key Difference Between Cash and Real Assets
I always correct people when they talk about the money they have in savings accounts or Premium Bonds as investments. I know, I’m no fun at dinner parties! It’s not because I’m a pedant, even though I am sometimes, it’s because there is a massive difference between money held in the bank and the real assets we’re talking about today.
Cash can never grow. One pound sterling will always be one pound. In a healthy economy, inflation will actually erode the buying power of your pound over time, so you’ll buy less stuff with it, but it’ll still be one pound. It can produce interest, of course, but those are new pounds or pence. The pound you have to start with will always remain one pound.
If, however, you buy one pound worth of shares in a company, those shares can increase in value, and may become £1.50 worth of shares, or £10. They have the potential to increase, and decrease, in value.
And on top of that, most real assets also produce an income to a greater or lesser extent. So that’s two strings to your bow: potential increase in value and an income – we call the combination of capital return and income yield ‘total return’.
If interest rates are higher than the rate of inflation, you can increase your wealth by keeping money in cash. If, as is usual, interest rates are lower than the rate of inflation, then you are losing money on any wealth you keep as cash in the bank. As New Accumulators, we are looking to build wealth for the future, and so we MUST invest.
In the next post, we’ll be looking at the main kinds of assets we can buy with our cash. Or you can find the previous post (the second half of my interview with Nick Lincoln) here.
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