Investment manager, Chris Sutton, explains ‘The Illusion of Money’, in other words, the fact that most of us view our wealth and income in money terms.
Click below to view the video.
The illusion of money is a term that was first developed by the American economist, Irving Fisher, during the late 1920s and popularised by the British economist, John Maynard Keynes.
The illusion of money refers to the fact that, when thinking about wealth or income, most of us think of it in its monetary terms. In doing so, we are mistaking the face value of money for its purchasing power – what we can actually use that money to buy. That is going to be affected by inflation.
So, when we think about cash or investments, we need to think not just of the monetary value of return, but the return after adjusting for inflation This is what we call the inflation adjusted or real return.
It has been possible to get 4% or even 5% interest return on cash in the UK, but we have also seen UK inflation running at over 7%. This means that while the money return on cash is at the highest level for almost 15 years, it is still producing a negative real return after we take into account of inflation. And in fact the real return on cash in the UK at present is at its lowest level at any time over the last 30 years.
Now that does not mean that cash will not form a part of most individual’s and household’s wealth. Cash has a number of important functions, including as a rainy-day reserve in the face of unexpected expenditure. But it does highlight the direct relationship between inflation and interest rates, and the reason why cash will typically struggle to protect the value of wealth against the effects of inflation.
This video has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction.
This video has been prepared for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the video is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this video should not be taken as a recommendation or advice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated. Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this video or any part of its contents.
This video does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.
