Dead money, living money

Having worked with many families, we have seen situations where money is hard at work for its owners, and others where it has not been put to good use at all.

A good analogy for this is a handful of seeds. You could plant them in the garden, where they'll face wind, rain, and the odd frost. Or you could place them carefully in a tin on the shelf, where nothing can touch them. The tin feels like the responsible choice. The seeds stay perfectly intact, and tomorrow they’ll look exactly the same as they do today.

But that’s not what seeds were meant to do.

The seeds planted in the garden will experience a range of conditions, but if you leave and come back in five years, you’ll have a tree. The tin will just contain the old seeds.

Money works in much the same way. Many investors’ first instinct is to keep their money safe. They may put it in a bank account or someplace where it doesn’t move around too much.

But that’s not what money was meant to do.

The Stewardship Trap

When money has been hard-won, like it is for most of us, we instinctively want to look after it and be good stewards.

However, when we don’t understand the challenge in front of us, our best intentions can do us more harm than good.

A core part of our financial planning philosophy is the belief that purchasing power is the only sane definition of money. This means that money is only useful to the extent that it helps you fund the life you want to live, forever.

Coupled with the reality that inflation is one of the biggest threats to the purchasing power of your money, it clarifies the challenge that lies in front of all investors, namely:

“Where will you place your money to increase the probability that your future purchasing power will be maintained, and hopefully increased?”

What Makes an Asset Breathe?

In our parlance, some assets are “dead”.

These are assets that sit still. Cash holds its number but loses its purchasing power year after year. Gold glitters but produces nothing. Bonds pay a fixed coupon that is eroded by inflation. These aren't bad in every circumstance, but over the long term, they tend to fall behind. They're seeds in the tin. They look the same as the day you put them there, but the world around them has moved on.

In contrast, some assets are very much “alive”.

These are assets that do things. Specifically, they produce income that tends to rise over time, and because of that rising income, their value grows too. Think of the great companies of the world. Businesses run by real people, solving real problems, selling real products. When you own a share of these companies, you own a tiny piece of something that adapts, earns, innovates, and pays you a growing stream of income for as long as you hold on.

Importantly for our discussion, equities (meaning ownership in productive businesses) have historically outpaced inflation across every meaningful long-term period we can measure. It's a track record that has survived a great deal of what the world has thrown at it.

Why We Keep Choosing the Tin

If living assets are so clearly better over time, why do so many investors cling to the dead ones?

In most cases, it’s because of how the investing journey feels.

A portfolio invested in productive businesses will bounce around. This volatility will feel uncomfortable, especially during periods of market uncertainty.

Our brains were not designed for long-term investing, and we’re still programmed to look for danger around every corner. This is how we survived and evolved.

Compared to this, “dead assets” look deceivingly attractive. We can be confident that tomorrow’s value will be very close to today’s value. But as we explained, the silent danger of inflation will erode our purchasing power if we do not understand the long-term need for “alive” assets.

It’s this uncomfortable trade-off that we help our client families to make, and it’s this simple decision that can be the difference between a retired couple having an independent retirement or outliving their money.

The tin will always feel safer. But the garden is where your money comes to life.