2023: A time to consolidate
To retire well, we need to focus on staying invested and putting funds into inflation-beating assets
THE last two or three years have been a complete washout for many economies. The same can’t be said for many stock markets, though. Thanks to massive fiscal support from governments, coupled with overly generous monetary support from central banks, stock investors have had a field day.
Trillions of dollars have been pumped into economies around the world. Central banks slashed interest rates to nothing, which, in turn, allowed governments to borrow freely. That then gave them the flexibility to inject money into where it was most needed. But now, it is payback time for all of us.
It is now time for governments to consolidate their finances. Governments know it would be fiscally unacceptable to increase their national debt by continually running massive budget deficits. If we think about it logically, this makes perfect sense. The more debt that a country is burdened with, the greater amount of interest it has to pay.
Consequently, if a country has to deploy more of its resources into servicing debt, there will be less money available for other functions of government, such as healthcare, housing and education. There are no free lunches.
Ignore economic noise
There are no free lunches for us, too. If we want to enjoy a long and happy retirement, then we need to remain focused. We need to ignore economic noise, and not only stay invested, but also continue to put our money into inflation-beating assets. One of the best ways to do that is to follow the lead from responsible governments and consolidate our finances.
No one can predict when economies will fully return to normality. But that is not quite the same as saying that a recovery will not happen. It could happen anytime. Our job is to prepare in advance for that eventual recovery. This can be achieved by making some simple changes to the way we invest.
We could start by looking at our cash investments. If we have money spread across various bank deposits, this could be a good time to consolidate them into one single account. It will save us time when trying to keep track of paperwork. Additionally, some bank deposits are tiered, which means we could get a better rate of interest the more we have saved.
Cash is bad over the long term
As comforting as a pile of cash might be, it will not be a good investment over the long term. Still, we should not turn our noses up at annual interest rates of between 4 and 5 per cent over the short run. Over the long run, however, cash is unlikely to hold its value as inflation eats into its purchasing power.
A better idea could be to invest in some inflation-beating assets. So, we should take a long look at our stock portfolios, as we can do some consolidation here, too. Consolidation could entail pruning back on the number of companies that we are invested in.
Consider selling those businesses that, in our opinion, are underperforming. If it means taking a loss, then so be it. But just because the price of a share is lower than our purchase price does not mean it is underperforming. Underperformance means a company has lost its way, and doesn’t know how to get back.
Track the market
As we consolidate our portfolios, it might be a good idea to reinvest the money into a tracker fund, if we cannot find anything better. An index tracker or exchange-traded fund will simply mimic the stock index that it is tracking. It is arguably one of the easiest ways to get exposure to a diversified portfolio of shares.
Alternatively, reinvest the money into companies with strong and reliable cash flows. These businesses can pay healthy and sustainable dividends, too. Check to see if the chosen companies operate a dividend reinvestment plan, which can be a hassle-free way of picking up shares cheaply.
We should look at 2023 as the year when we can clean up our finances. If we have spare cash, we could consider paying down any debts we have outstanding. We should also keep an eye on our pension pots. It goes without saying that we should be adding money to it regularly.
When economic conditions are bad, we should be doubling down on the money we invest. Those who have the courage, and more importantly the patience to invest, will most likely be the ones who will look back in future years at the great opportunities that were presented to them during these very turbulent and troubling economic times.
The writer is co-founder of The Smart Investor
