For those who have spent time with us, you know that our preferred definition of long-term risk is purchasing power. Purchasing power is the notion that the $20 you earned or saved yesterday is worth $20 plus inflation in the future. Put another way, purchasing power is the power for $20 earned or saved yesterday to acquire the same goods in the future.  See below for an example based on a $100 basket of goods purchased in 1967 versus a similar basket 50 years later.

As you can see, average inflation over this time period was 4.03%. One could assume then that so long as their money earns 4.03%, they will be able to maintain their standard of living and keep up with the rising cost of living. However, as the image below illustrates, costs of living do not increase by 4.03% year over year. The major categories of living expenditures are entertainment, education and housing. These three categories have increased exponentially more than inflation. The costs of seeing a movie has increased 5.6% since 1967, tuition at Harvard has increased 6.7% and the average house in Toronto has increased 7.4% over this same period.

For this reason we believe the erosion or extinction of your purchasing power is the greatest threat to your financial well-being and the best definition of long-term risk.  

That said, risk is personal to each person’s circumstance and short and long term needs. For example, a client with a short term need for funds (i.e. for a home purchase, car or education) would be less concerned with maintaining their purchasing power for those funds. Instead, that money should be left in cash or something guaranteed to ensure it is liquid and preserved in the short term.

For further reading, click here to Own Your Future or click here to contact any member of of our team.