THE IMPORTANCE OF PERSPECTIVE
April 17, 2023
Author: Jason Kirchhoff
How we perceive data and information can be greatly influenced by our perspective. The pictures below are good examples of how a forced or single perspective may not always tell the full story.
These types of perspective “tricks” can be found in all areas of life but especially in the world of investments and economics. How data or information is presented can have a dramatic impact on how it is perceived. To emphasize the significance of perspective, let me share a few real-time examples.
Example 1 – U.S. Money Supply
There have been several market prognosticators discussing the largest decline on record of the U.S. money supply. The money supply can be measured in different ways, but the most common is through M2, which includes cash, checking accounts, and other assets easily convertible to cash. The first chart below depicts the steep drop in year-over-year growth of M2 in the past year, following the significant increase in M2 due to the Covid-19 pandemic from 2020-2021.
The recent decline in M2 has been making headlines and is often used to argue that inflation has peaked, the Fed will need to cut interest rates soon, and that deflation is inevitable. However, just like most analyses based on a single data point, it is crucial to consider things from multiple perspectives.
The chart below is also of U.S. M2, but instead of measuring the year-over-year growth rate it shows the absolute value over the same time horizon.
If you look closely, you can see the recent decline on the far right of the chart. We use this example not to predict inflation but to illustrate how a narrative or data point can appear differently depending on how you view it, similar to an optical illusion. Are we looking at rectangles or circles?
Example 2 - De-Dollarization
The "death of the dollar" articles and news stories are making the rounds again. These stories tend to resurface every 4-5 years and often have an apocalyptic tone.
Recent reports on this topic have been fueled by a few emerging market countries' high-profile announcements of their willingness to trade with other countries using their own currency instead of the US dollar. However, when you consider the size of these transactions in the global economy, they are insignificant.
By several measures such as global reserves, transaction volume, debt issuance, and banking claims, the US dollar is the leading currency by a vast margin. While its use may decline over time, there is no practical alternative to replace it in the short-term. Therefore, any discussion about a collapse of the US dollar or its replacement with a new global reserve currency should be viewed with a long-term perspective.
One of the most effective ways to help safeguard portfolios against a sudden drop in currency value is by maintaining a globally diversified portfolio.
Why Perspective Matters?
The importance of perspective cannot be overstated when it comes to building portfolios. It is crucial to integrate investments with comprehensive planning and align them with liquidity needs and time horizon. For short-term financial goals, the return of capital is more critical than the return on capital, and we allocate to lower-risk investments that historically generate lower expected returns. On the other hand, for longer-term goals, we allocate to asset classes that are likely to grow at a reasonable rate above inflation, such as global stocks and real estate. Achieving long-term real returns often involves dealing with short-term volatility, but with the right perspective and proper planning, short-term volatility should be seen as a "blip" in the long-term financial plan and part of the "price of admission" to earn higher returns and compound wealth over time. By taking a long-term perspective and maintaining a diversified portfolio, investors can navigate market fluctuations and achieve their financial goals.
THE OPINIONS EXPRESSED ARE THOSE OF MCGILL JUNGE WEALTH MANAGEMENT AS OF THE DATE PUBLISHED AND ARE SUBJECT TO CHANGE. THIS MATERIAL DOES NOT CONSTITUTE INVESTMENT ADVICE AND IS NOT INTENDED AS AN ENDORSEMENT OF ANY INVESTMENT OR SECURITY. ALL INVESTMENTS CARRY SOME LEVEL OF RISK INCLUDING THE POTENTIAL LOSS OF ALL MONEY INVESTED. NO INVESTMENT STRATEGY CAN GUARANTEE A PROFIT OR PROTECT AGAINST LOSS.
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