Consumer Prices And Your Wealth Goals

A key component in projecting the growth of your wealth is trying to anticipate how inflation will impact your cost of living over the course of the rest of your life:

Growth of your money (average annual return over the rest of your life) less the rate of inflation (average annual increase in the cost of living over the rest of your life) of your lifestyle expenses. 

What you consume, how much you consume and where you do your consuming are all important in getting a handle on what to expect for future cost of living increases. 

Statistics Canada tells us that the "average" household saw a 2.4% increase in its basket of goods over the last 12 months ending in October.

What you consume: (according to StatsCan) the average Canadian household consumes like this:

Transportation costs which account for about 20% of the average household's spending rose at a rate of 4%. Gasoline prices were up 12%.

Where you consume:

In Ontario, energy prices fell 2.4% following the termination of the carbon cap and trade program. Gas prices fell 4%.

However, all of this may be moot because the drop in oil prices to close to $US 50 per barrel (West Texas Intermediate crude oil) recently, if sustained could push CPI inflation lower by close to 1 full percentage point.

The volatility in the prices of energy and food from month to month forces the Bank of Canada to try to come up with formulas for a less volatile "core" CPI number which they monitor for policy making (interest rate setting) purposes:

For our client Wealth Forecasting, we make the assumption (unless we adjust it to meet a clients very specific requirement) that inflation will likely grow at a rate of 2.5% into the future.

In our equation for the growth of their / your money, the average annual return over the rest of our clients lifetime needs to exceed 2.5%.

The risk-free rate of return (a 90 day Government of Canada T-bill) will get you bout 1.7% (at the wholesale level, before fees and taxes) at the moment. That will not get you ahead of the annual cost of living increase.

In order to beat that annual increase in your cost of living, you are going to need to take risk.

How much risk?

Enough to beat your inflated cost of living, but not too much to jeopardize the integrity of your investments.

You can try to do it yourself (DIY) or as Larry Bates will suggest in his very important new book Beat The Bank, assemble it yourself (AIY), or you can look to the experts in risk management, but make sure that you are fully aware of the costs that you are having to pay.

What you need to be aware of is that any risk that we take may bring about potential swings in the short-term value of your investments (as current financial markets are creating at the moment). Those, however, will be more than offset in future years as your investments grow (and they will) as long as you can maximize the return per unit of risk that you take.

Most importantly, make a plan and stick to it. Exiting your plan because of some short-term volatility is a sure way to never achieve your goals.

And, as is always the case, past performance is no guarantee of future returns, but at High Rock we work darn hard to get the best possible risk-adjusted returns at a very modest cost over the long-term. A good way forward to achieving your wealth goals.