This purely a speculative piece. Proceed with caution and as always consult your financial advisor before making any investment portfolio decisions.
As an investor, the goal is to be wise as possible about my investments while looking for where others are blind. The idea is to see the risk that others are missing so you can manage ahead of it. Paraphrasing a wise mathematician, risk never leaves the system, it just changes form. So, so as I was doing some studying on Kenya’s current economic and indicators, trying to gauge where we are headed it reminded me of an article. It addressed the issue of making losses when everything seems fine upon face value. Analysts have been speculating for months now on long-term effects of the pandemic and the road to recovery.
If you are interested to learn how you can lose money while your portfolio grows, dive in and read on. The main focus of this article is paper assets – stocks, bonds and other cash-equivalent assets.
The Destroyers of Wealth
For long-term investors, there are three things that can destroy your wealth – a combination of monetary inflation, asset deflation and inflation taxes. As things worsen in the economy, here are is the assumption as specualted by various analysts:
Monetary Inflation Hiding Asset Deflation
Inflation will take place as a result of the oversupply of money and shortages. Thus, the inflation in prices of goods will hide asset deflation in investment value.
Let me explain.
Monetary inflation is the sustained increase in the money supply of in a country. The supply of money within the country will increase, as interest rates fall. Currently, banks are seeing more defaults on loans, and will soon start writing off loans due to the continued strain the pandemic continues to cause. Earlier this year, they had also put a freeze to lending but soon, but I believe will start lending at lower rates to survive.
The fall in interest rates will result in an oversupply of money, and cause a fall in purchasing power of money in real terms. Thus, the prices of goods will increase and predicted shortages will take effect as unemployment continues to bite.
This loss in control over inflation and unemployment will result in a decrease in the shilling value and will hide the decrease in asset value. At this stage though, I am only posing an argument. Hence, this is merely theory and speculation. It is yet to be seen playing out in the real world.
Learn More: How to Make 20% On Dividend Yields Every Year
Asset Deflation & Inflation taxes
We have established that our assets are losing value as a result of monetary inflation. Thus, inflation tax will then make it even worse. Inflation tax refers to taxes paid on non-existent income. The gains perceived to be profits when adjusted for inflation are actually losses. Thus, it will cost you more to hold these assets since it destroys the purchasing power of what remains.
Here is an example of how this can play out:
| Period of Investing | Asset Index | Value of the Shilling | Inflation-Adjusted Asset Index | Percentage Change |
| Beginning | 1797.67 | 1 | 1,798.67 | 0% |
| End | 2,673.94 | 0.6 | 1,604.36 | -11% |
| “Profit” | 876.27 | -194.31 | ||
| Taxes (5%) | -43.81 | -26.27 | ||
| After Tax | 832.46 | 499.48 | -28% |
Learn more: How to Plan Your Investments Against Investment Risk
By And Large
As an investor, it is extremely difficult to outrun this problem. It will also be quite difficult to earn real profit in such a market. Even with the vaccine, the lag time to recovery will be a while. Inflation and unemployment are one of the hardest things to control once out of control. Therefore, the aim is to make a better decision than everyone else in order to make a lot more money to overcome and keep wealth intact. We are entering into a new time of investing that is very different from what we have been through.
Happy Building!
Image credits: To by Olya Kobruseva from Pexels
Article Sources:
- Business Daily. “Land, house prices decline on Covid-19 slowdown, https://www.businessdailyafrica.com/bd/economy/land-house-prices-decline-on-covid-19-slowdown-2298312.” Accessed on 05th December 2020.
- Kenyan Wallstreet. “Virus Triggers Increased Loan Default in Kenya’s Credit Market, https://kenyanwallstreet.com/covid-19-to-increase-loan-defaults-transunion/.” Accessed on 05th December 2020.
- Daniel Amerman, CFA. “The Secret History of A 70% Market Loss – What a Secular Bear Market In the 2020s Could Look Like, http://danielamerman.com/va/ccc/G4SecBear.html?__s=vefa1cmnhevnf4wseixk&utm_source=drip&utm_medium=email&utm_campaign=Todd%27s+picks+-+Are+You+Ready+For+What+Comes+Next%3F.” Accessed on 05th December 2020.
- Elizabeth Irungu, CFA. “Kenya to Face Deflation if Economy Continues on Lock Down, https://www.linkedin.com/pulse/kenya-face-deflation-economy-continues-lock-down-irungu-cfa/?articleId=6684788424169295872.” Accessed on 05th December 2020.
- Mint. “What History Tells us About Pandemics and Interest Rates, https://www.livemint.com/market/mark-to-market/what-history-tells-us-about-pandemics-and-interest-rates-11594392564791.html.” Accessed on 05th December 2020.