As we all wait with bated breath for the Chancellor’s statement tomorrow, I am indebted to 7IM for the following:
“We all know that “Beauty is in the eye of the beholder”. But that idea applies just as much to economics as it does to art. Take the hottest topic around – inflation.
A survey by the Bank of Japan last month found that 86% of the population had seen “unfavourable price rises”, with 46% of them saying the prices were “SIGNFICANTLY” higher than a year ago.
Sounds serious.
Until you realise that annual inflation in Japan is 3%.
It’s tempting to ask what all the fuss is about. After all, we’re at 10% inflation here in the UK (11.1% as of this morning)! But remember the “eye of the beholder.” It’s about what’s “normal.” Inflation has averaged 1% for forty years in Japan. So even a tiny increase feels brutal.
Compare that to somewhere like Sri Lanka, where inflation is a savage 66%. But actually, in Sri Lanka, surveys aren’t anywhere near as negative as in Japan. That’s because average inflation over 40 years has been 11% (and often above 20%). A different baseline for comparison – resulting in different behaviour.
Source: IMF WEO/7IM
Thinking about different inflation experiences around the world is a helpful reminder that what you’re used to defines what you expect.
And the follow-up to that is that what you expect dictates your reaction to what happens.”
I really enjoy considering how psychology influences financial decisions and stats like this are a reminder that whilst we think we all see the world in the same way, our interpretation is entirely dictated by how we frame it.
That’s why numbers are never the whole story when it comes to investing – it’s about the people behind the numbers as well.
I am delighted to report that none of my clients panic when confronted by volatility as part of a long-term investment strategy, and I like to think this is because I have conditioned them to expect it! None of us like it when it happens BUT, we know how to react when it does, and that is to wait for it to pass.
I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered FCSI
Managing Partner
