When Money Was No Longer Free

Between 2009 and 2021, long-term investors were blessed to operate in a low-interest-rate environment. Despite coming off one of the worst market declines in history, The Global Financial Crisis, the following decade saw one of the longest bull runs in history.

This period will always be remembered for capital that flowed like a river after rain. Easy and inexpensive access to credit, an atmosphere of optimism, a growing tech industry, and steadily climbing asset prices formed a landscape where money felt almost ‘free’. But economic seasons, like nature’s seasons, inevitably change.

The Covid-era interventions by Central Banks around the world led to a predictable increase in inflation, which promised to be temporary but has endured far longer than hoped. As is often the case, the cure was worse than the disease.

Forced to fight the invisible dragon that is inflation (the long-term investor’s worst enemy), Central Banks had no option but to raise interest rates. Indications are that inflation is on the wane, but it will be some time before rates return to their long-term average. The damage has been done, and investors around the world will have to adjust their behaviour.

Stretched Finances

Low interest rates can paper over the cracks of poor financial habits. However, in the current environment, all investors will need to increase their discipline and focus to ensure that they stay on track to live the life they aspire to. Short-term habits will have long-term impacts.

The foundational habit of all financial success, living within one’s means, is under threat for most investors as mortgage rates have put the family budget under severe pressure. This will also impact many people’s biggest asset, their homes. The result for many is a reduction in discretionary spending or investment contributions. Which way, dear investor?

The changing landscape doesn’t just impact individuals but businesses too. Stretched consumers will affect corporate earnings, and more expensive capital will likely result in lower capital expenditure. We are confident that corporate management will find ways to adjust, as they always do, and remain optimistic about long-term returns. However, the short-term is always uncertain.

A Time For Better Habits & More Discipline

This is a challenging time, but every cloud has a silver lining. We are all faced with an opportunity that will pay dividends for years to come, namely a chance to re-evaluate and adjust our spending and investing habits.

The last few years have provided a stark reminder that inflation destroys purchasing power (the only sane definition of money) and that investors must carefully consider which asset classes offer the best long-term protection against this force. Smart investors know that owning the great companies of the world (through the equity markets) has been the best long-term asset, historically.

Additionally, the reality that access to capital is not free in most environments forces us to be very careful about what obligations we take on and how we choose to spend our money.

The need of the hour is financial discipline. This doesn’t point to being overly conservative or risk-averse. Instead, it hints at wisely navigating the current fiscal landscape by making informed decisions, staying the course with a long-term plan, controlling non-essential spending, and resisting quick financial fixes.

Rough seas do make skilled sailors. It’s in facing these challenges head-on that we build resilience. Yes, the money is no longer ‘free’, but the seeds of discipline we sow now could lead to an abundant harvest. It’s not the changing tides of interest rates that determine our financial futures but our responses to them.