By Godfrey Kenneth Gobba
For most of us, the safety of our money is paramount. Thus efforts to secure our money should be focused on achieving both the safety of our principal and the safety of our purchasing power.
However, majority of us tend to focus primarily on the safety of our principal which of course is only half the safety equation.
So this got me thinking. In terms of principal and purchasing power, how safe is my money?
In My Bank
A couple of years ago I got this savings account in a popular bank that promised zero monthly charges and for a while I enjoyed absolute safety for my principal.
This account however paid no interest which meant that whereas I had absolute safety for my principal, I had zero safety for my purchasing power.
But several months ago, this romantic “zero monthly charges” relationship ended without even a phone call or an email to say good bye and now every month I pay 1000 shillings to keep my money in that savings account.
It is a small fee but if I leave Shs1,000,000 in this account for the next 20 years, I will be left with only Shs760,000. That would be a 24% loss of my hard earned principal and God knows how much I would have lost in purchasing power.
So given that my principal keeps reducing every other month and I have zero interest, I would conclude that in my bank, I have zero safety for my principal and zero safety for my purchasing power.
Under My Bed
If I kept my money under my bed, I would have safety for my principal but only for as long as the burglars stayed away and some greedy “metal gathering rat” didn’t end up feasting on my life savings.
I would also have zero safety for my purchasing power so all in all, keeping my money under my bed just wouldn’t work for me.
In Real Estate
My land and rental properties definitely keep my money safe and for as long as I never experience a land slide or a devastating fire on my property, I will gladly say that I have absolute safety for my principal.
Land prices and rental incomes also tend to go up with inflation so this inbuilt inflation protection mechanism gives me safety for my purchasing power.
However, if I happened to have acquired my property during a period of high inflation, then all of this safety would vanish if the economy ever decided to reset.
In The Stock Market
Many will argue that there is no way I can claim to have safety for my principal in something that is as risky as the Stock Market but I beg to differ.
Your argument would probably be that if stock prices ever fell I would suffer devastating losses to my principal but my counter argument would be that you are looking at it from the perspective of a short term speculator and not as a long term investor.
Speculators look at stock prices but investors look at the underlying value of the businesses that just happen to have their shares priced in the Stock Market.
Stock prices will always fluctuate. You could go dry fast for 40 days or sacrifice your grandfather’s entire bearded goat collection but stock prices will still move up and down irrespective of what you or your ancestors think or do.
So when measuring how safe my principal is in the Stock Market, the fluctuation of stock prices is not what I would be worried about.
I would be much more concerned about the assets and earnings of the businesses that I own in the Stock Market.
If they ever started losing their assets to creditors or if for some reason they stopped being profitable, then I would really start getting worried about the safety of my principal.
By investing in the stock market, I own businesses that produce goods and services whose prices rise with inflation just like everything else, so I would have safety for my purchasing power in the Stock Market thanks to this inbuilt inflation protection mechanism.
Ultimately, the safety of my principal in the Stock market will not be based on the rise and fall of stock prices. It will be based on the strength of the balance sheets and continued profitability of the businesses I own in the Stock Market.
So How Safe Is Your Money?
Well you have heard my side of the story and it is now up to you to evaluate your own financial situation to determine how safe your money really is – right now.
How safe is your principal from loss and how safe is your purchasing power from inflationary erosion?
TILL NEXT TIME
The author is CEO, African Investor Academy
