Are Your Investments Truly Building Wealth?
The Profit Fallacy: How inflation can erode your principal investment and why focusing solely on profits can be misleading with George Antone.
In Part 1 of the Profit Fallacy, George uncovers the danger of fixating on profits while ignoring the erosive force of inflation on your principal. In Part 2, George unveils the solution to this dilemma and explores how to structure your investments to mitigate the effects of inflation.
Understanding the Profit Fallacy
Investors fall victim to the Profit Fallacy when they fixate on profit figures without factoring in the corrosive effects of inflation on their principal investment. Consequently, they may believe they are making gains when, in reality, they’re losing money in terms of real purchasing power.
Why is the Profit Fallacy an invisible trap?
Imagine you invest $100,000 with hopes of turning a profit in the future. This $100,000 constitutes your principal, while the profit represents your financial aspirations, whether it’s in real estate, private lending, stocks, or any chosen investment avenue.
Fast forward several years, and you successfully retrieve your $100,000 along with an extra $30,000 in profit. You might be celebrating at this point, thinking you’ve made significant financial progress. However, a closer look reveals the hidden truth about your investment’s impact on your wealth.
Profit vs. Purchasing Power
George highlights the importance of gauging your purchasing power when assessing a potential investment.
Returning to our example, consider that a cup of coffee costs $1 when you first invest. With your initial $100,000, you could purchase 100,000 cups of coffee. Over time, however, coffee prices rise to $1.30 per cup. So, even though you’ve recovered your $100,000 principal, it can now only buy 77,000 cups of coffee. Fortunately, your $30,000 profit can still buy 100,000 cups of coffee.
But here’s the critical insight:
You embarked on this investment journey to build wealth, not merely to break even. Despite your perceived $30,000 profit, you have failed to break even because you’ll eventually have to pay taxes on that profit. What may seem like a commendable profit is, in reality, pushing you backward financially.
A Novel Solution: Sharing Profits and Strategic Debt
George Antone presents a novel solution to this predicament: sharing profits with others or using debt strategically. Let’s examine two scenarios:
Sharing Profits:
Instead of retaining all profits, consider sharing a portion with a partner. This can help you avoid the depreciation of your principal investment and preserve purchasing power over time.
Using Strategic Debt:
Borrow funds for investment, pay interest on the loan, and watch as the real value of your initial capital remains relatively stable while you gain substantial profits.
George Antone’s insights highlight the importance of looking beyond the illusion of profit and focusing on how to structure your deals to mitigate the effects of inflation.
“To escape the illusion of building wealth, you must understand the basic principles of the financial system. Only then can you identify and avoid the traps it sets.”
– George Antone
Escaping the Profit Fallacy
To evade the pitfall of the profit fallacy, consider these strategic steps:
Structuring Your Deals:
Many investors focus all of their attention on acquiring assets without paying enough attention to how they finance their deals for maximum benefit.
Choose The Right Assets:
Not all assets are equal. In the correct sequence, the right asset selection is pivotal for financial success.
Regular Portfolio Rebalancing:
Over time, your portfolio can become skewed toward certain assets, increasing your vulnerability to the profit fallacy. Regularly rebalance your portfolio to maintain diversification across asset classes and industries.
Large financial institutions have teams of actuarial scientists and access to a lot of data to avoid the Profit Fallacy. This can be difficult for individuals, but Fynanc’s Amplified Approach uses AI-driven financial tools to give members the same ability as financial institutions to make data-driven decisions, allowing members to reach their financial goals faster, safer, and more confidently.
Make sure to watch Part 1 of The Profit Fallacy:
