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Inflazione al 5%: perché ti serve un aumento dell’10% — Transcript

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0:00Inflation in Italy in October was 5.4%.
0:05If we earn € 38,000 gross per year and,
0:08with inflation at 5.4%, we simply want
0:10to maintain our purchasing power, how
0:12big of a raise do we need?
0:155.4%, one would say, right?
0:18It seems logical. Actually no, we need
0:21more than 10%.
0:24And not to be better off, not to buy
0:26more things, just to stay at the same
0:28point; and a 10%annual raise, let's be
0:30honest, almost nobody gets that.
0:34It sounds crazy, but this is exactly
0:36what really happens to our pockets in
0:38real life, not in Excel files.
0:41The reason is that for every € 100 raise
0:44in that income bracket, only about 40
0:46reach our pockets.
0:48The other 60 are split up. Social
0:50security contributions, income tax,
0:51disappearing deductions, and local
0:53surtaxes. And the most absurd thing is
0:55that those who earn double get to keep
0:57more of those € 100, about 50.
1:01By the end of this episode, we will know
1:03why a salary alone is not enough and how
1:06to invest to truly grow our purchasing
1:08power, especially in this environment
1:10where inflation seems to be a travel
1:12companion we won't get rid of anytime
1:14soon.
1:15But, above all, we will understand that
1:18defending ourselves against inflation
1:20can mean two very different things that
1:22require two very different portfolios.
1:25Get comfortable, let’s defuse the tax
1:28traps and save the value of our savings
1:30. In this podcast, we talk about money
1:33and tell it like it is to learn how to
1:35invest better and build the life we
1:37desire. If you haven't already, follow
1:40the channel on YouTube, Spotify, or
1:42Apple Podcasts. It costs you nothing,
1:44but for me, it is a vital gesture to
1:46keep this channel going.
1:49So, we were saying that in October,
1:51inflation in Italy rose to 5.4%from 4.2
1:54%in September.
1:56Of course, the vast majority of that
1:58figure depends on energy prices, which
1:59skyrocketed due to the war in Iran.
2:02But energy inflation sooner or later
2:04spreads into the real economy, and once
2:06the prices of goods and services go up,
2:08they rarely come back down.
2:11And in any case, as we have said many
2:13times before, we find ourselves in an
2:15economy that is structurally dominated
2:17by scarcity and supply crises: energy,
2:19defense spending, geopolitical
2:21fragmentation, infrastructure investment
2:23spending, and much more.
2:25Not to mention the persistent deficits
2:27of almost all major countries in the
2:29world.
2:30If you accumulate budget deficits every
2:32year and increase the debt stock to
2:34finance public spending, then inflation
2:36works in favor of the debtor and to the
2:38detriment of creditors and consumers.
2:41The real value of debt decreases, but
2:43the price is paid by the holders of
2:44those government bonds and by consumers
2:46who face higher prices.
2:48So let's resign ourselves to it.
2:51The stagnant inflation of the 2010s
2:53probably won't be on the menu for a
2:54while, and, by the way, if it does
2:56return, it might be for reasons that are
2:58not exactly desirable, like a nasty
3:00recession.
3:02But if inflation is to be our unpleasant
3:04traveling companion, what solutions do
3:05we have?
3:08Well, if things are going to cost more,
3:09perhaps much more and persistently, the
3:11most intuitive path seems to be
3:13increasing income, right?
3:15Earning more.
3:17Before Debull, I worked as a headhunter
3:19for 14 years. I met tens of thousands of
3:22people, and the most frequent scene was
3:24always the same.
3:26A candidate changing jobs, with
3:28everything that entails, for a 10-20%
3:30salary increase.
3:33Then the first paycheck would arrive,
3:35and if we start from € 35,000 gross, for
3:37example, the average increase is around
3:39€ 5,000, which becomes about € 1,900 net
3:42per year, which, divided by 14 months,
3:44comes to € 136 per month.
3:47Now, it's not irrelevant, heaven forbid
3:49, but it very much has the effect of
3:51spinach in a pan: when you put it in, it
3:53overflows, and 10 minutes later, it
3:55would fit on a coffee saucer.
3:57If you think it's little that € 5,000
4:00gross becomes € 1,900 net, well, this
4:02difference is the marginal tax rate, and
4:05when the raise only serves to keep up
4:07with rising prices, it's called fiscal
4:10drag.
4:11It works like this. In Italy, income tax
4:13brackets are fixed in nominal euros.
4:16You pay 23%up to € 28,000 of income, 33
4:19%up to 50,000—or perhaps 55,000 with the
4:23new reform—and 43%above that.
4:26Those thresholds, however, don't move
4:28with prices, so when our salary rises to
4:30keep up with inflation, a larger and
4:32larger part of our income ends up in the
4:35higher bracket, even if in real terms we
4:37aren't earning a single euro more.
4:40Double bad luck: inflation eats away at
4:42my purchasing power on its own, and on
4:44top of that, I have to pay more taxes.
4:46And then there is an aggravating factor
4:48: deductions.
4:49Employee tax deductions are the amount
4:51the state discounts from our taxes,
4:53which decreases as income rises.
4:56Between € 28,000 and € 50,000 of taxable
4:58income, every extra euro we earn makes
5:00us lose a piece of the deduction, and
5:02between € 32,000 and € 40,000 another
5:04one is added—the one introduced with the
5:06tax wedge cut—which zeroes out in that
5:08range.
5:09Now let's put it all together. Once
5:12contributions are deducted from an extra
5:14€ 100 of taxable income, we must then
5:16subtract 33 for the tax rate, nearly 9
5:18due to lost employee deductions, and 12
5:20and a half for another vanishing
5:22deduction, totaling € 54 in income tax
5:24out of 100. And that is still excluding
5:26regional and municipal surtaxes.
5:29For the record, in this little
5:30calculation we just performed, the
5:32entire tragedy of the Italian economy is
5:33captured in a nutshell.
5:36The exorbitant cost a company must bear
5:38to increase an employee's income versus
5:39the pittance that remains, with real
5:41wages that on average haven't grown
5:43since I was in elementary school.
5:45Now, let's take this already tragicomic
5:48situation and pile 5.4%inflation on top
5:50of it.
5:52The question is the one from the
5:54beginning: by how much must I increase
5:56my gross salary just to preserve my
5:58purchasing power?
5:59Across the entire income curve, you need
6:02more than inflation, and in the middle
6:04bracket, almost double.
6:05And recent experience tells us that is
6:07not what typically happens.
6:10The Bank of Italy ran the numbers for
6:12the 2022-2025 period—the time of the
6:14great price surge following the start of
6:16the war in Ukraine—and found that income
6:18adjustments covered, on average, barely
6:2062%of inflation.
6:22To be fair, it must be said that the
6:24same Bank of Italy study reports that
6:26the tax cuts decided by governments
6:27during those years more than compensated
6:29for those 18 billion in fiscal drag on
6:31average.
6:32But I say "on average" because the
6:34recovery came when and how the
6:36government decided, not automatically;
6:38that is, it is a discretionary refund:
6:40sometimes it arrives, sometimes it
6:42doesn't, and we never know to whom in
6:44advance. And if we widen our view, the
6:46picture is even clearer.
6:48Compared to 20 years ago, average real
6:51wages are still worth 5%less.
6:53It is obvious that salaries and the real
6:55economy in Italy stopped speaking to
6:56each other a long time ago.
6:58Be careful, though, because I don't want
7:00the wrong message to get across.
7:02The first asset class against inflation
7:04is us: our ability to earn, our human
7:06capital, is our most important asset.
7:09I confirm this word for word.
7:13Asking for a raise, changing jobs at the
7:14right time, investing in skills that the
7:16market pays for.
7:18Following The Bull Playbook, which comes
7:19out every other Friday with guests much
7:21more extraordinary than me.
7:23All of this remains fundamental.
7:26But today's numbers tell us that all of
7:27this is not enough. Your salary is the
7:29fuel, but with raises that chase
7:31inflation and a tax system that takes
7:33nearly 2/3 of it in the wrong bracket,
7:35it’s like having a car that gets 10 km
7:37per liter.
7:38You need an efficient engine, and
7:40obviously, the engine is making the
7:41money we manage to set aside work for us
7:43.
7:44Except here comes the second nasty
7:46surprise, because the same mechanism
7:48that screws us on our paycheck awaits us
7:50identically with our investments.
7:53But before the second screw-up, let's
7:54say right away how to save ourselves
7:56from the third screw-up: throwing money
7:58away on commissions and various costs.
8:00As John Bogle used to say, you get what
8:02you don't pay for. And so, what better
8:05thing to do than set up ETF savings
8:07plans with zero commissions with
8:08Scalable Capital? Which, by the way, is
8:11also the sponsor of this episode.
8:12Scalable is the German bank that I've
8:14been using for 3 years to invest part of
8:16my portfolio and that from today offers
8:17the administered tax regime to its
8:19Italian clients. So they'll take care of
8:21paying your taxes with your money,
8:22obviously, because after all, it's
8:24Scalable Capital, not Scalable Charity.
8:26By the way, its country manager
8:28Alessandro wasn't even stopped by a bus
8:30that hit him in a crosswalk a year ago.
8:33He was almost meeting his maker, then he
8:34said, "No, no, send me back down because
8:36I've got the administered regime to
8:37launch." Now that he's made it, and
8:39since with Scalable you invest almost
8:41for free and don't have to worry about
8:43taxes anymore, why don't we open an
8:44account using the link in the
8:46description, so your favorite bull gets
8:47a little happy too? Oh, and besides the
8:49zero-commission savings plans, there's
8:51also cash remuneration at the ECB rate
8:53with no strings attached, the ability to
8:55connect it to your favorite cloud or
8:57ChatGPT, and much more.
8:59So, link in the description, open an
9:00account with Scalable and start spending
9:01less on your investments.
9:03Now, reducing costs is great, but when
9:06we invest, sooner or later we pay 26%on
9:08profits, right?
9:09We all know this.
9:12What we ask ourselves less often, though
9:14, is: 26%of what?
9:17Of the nominal gain, meaning even the
9:19part that just serves to keep up with
9:21prices. Let's take an example. Let's say
9:24an investment returns 7%in a year and
9:26inflation is at 3%.
9:29The real gain will be about 4%.
9:32But the tax authority doesn't look at
9:34the 4%, it looks at the 7%and takes 26%
9:36of that, which is almost two points.
9:39Two points on a real gain of 4.
9:42Translated, with a 26%tax rate, the tax
9:45authority takes 45%of our real gain, and
9:48if we add the stamp duty paid every year
9:51on the account value, we get to 51%,
9:53more than half.
9:56Vote for me and I'll index capital gains
9:58taxes to inflation.
10:00No, I'm kidding, but it would be a nice
10:02idea. Jokes aside, there is a variable
10:04we can play with, and that is how much
10:06we pay in those taxes.
10:09We have shown many times that delaying
10:11tax payments by using efficient
10:13accumulating instruments and limiting
10:15trading activity as much as possible
10:17significantly reduces the tax burden.
10:20It is not just about postponing taxes,
10:22but actually putting the taxable capital
10:24to work so that it generates further
10:26returns.
10:27For instance, the difference between
10:29paying taxes on capital gains every year
10:32or all at the end over 30 years can be
10:34worth 30%more in final net assets.
10:37It is a mini tax-based leverage. It is
10:39as if the government gave us an
10:41interest-free loan that we put to work
10:43for 30 years.
10:44This is an extreme example, but the
10:46point is clear. Procrastinating taxes as
10:48much as possible is one of the most
10:50reliable sources of return.
10:53That said, the first concrete step we
10:55can take is choosing where to invest
10:57wisely; even before looking for a
10:59miraculous inflation-hedging asset,
11:01let’s use instruments that allow us to
11:03keep more of what we earn.
11:07We have seen the benefit of deferring
11:08taxes, but in some cases, we can also
11:10reduce what we pay today, meaning we can
11:11go where the tax authority gives back
11:13instead of taking away.
11:15The first lever is, in fact, the pension
11:18fund. Contributions we pay into the
11:20pension fund are tax-deductible from
11:22income up to € 5,300 per year. Deducting
11:24means the state returns that money at
11:26our highest tax bracket rate. And which
11:28bracket has the highest tax rate on the
11:30last euro? The one where the "hump" is.
11:33If we pay contributions directly through
11:35our paycheck, in the € 35,000 to €
11:3844,000 gross annual income bracket, for
11:40every € 100 paid, we save about € 56 in
11:43taxes. Those same euros taken as a raise
11:45would leave us with € 40 in our pocket,
11:47whereas putting them into a pension fund
11:49costs us only € 44.
11:52And obviously, if we join our collective
11:53bargaining agreement's fund and pay our
11:55minimum share, the employer is obligated
11:57to pay theirs.
11:58In the commerce sector contract, for
12:00example, on a gross annual income of €
12:0240,000, we would put in about € 220 as a
12:04minimum mandatory contribution, and the
12:06company would put in € 620.
12:10And by the way, when we start
12:11withdrawing money from our pension fund
12:13once we retire, the taxation could drop
12:15to as low as 9%if we have had at least
12:1735 years of fund membership.
12:20The second lever is, naturally, a
12:22portfolio of accumulating equity ETFs.
12:24What we want, in fact, is to capture the
12:27average market return by reinvesting
12:29dividends rather than having them
12:30distributed, and without getting anxious
12:33every time the market acts up.
12:35Dividend reinvestment plus tax deferral
12:38are the secret sauce—well, not so secret
12:41, actually—for maximizing our equity
12:43investment.
12:45The combination of these two factors, in
12:47fact, is what has historically made
12:49stocks one of the best vehicles
12:50available for beating inflation in the
12:52long term.
12:53Over the last 100 years, no other asset
12:55class has come remotely close, and I’m
12:57not just talking about the S&P 500.
13:01Investing in stocks has been a success
13:03story in basically every developed
13:05market, to varying degrees, with an
13:08average global return of 5.3%above
13:10inflation and 4.5%for countries outside
13:12the United States.
13:16So, if we want to aim for a positive,
13:18real expected return in the long term,
13:20stocks are certainly a great option,
13:22albeit with a caveat that we’ll see in a
13:24minute.
13:26In the short term, however, stocks have
13:28never been a good protection against
13:30inflation.
13:32If we look at the periods with the
13:33highest inflation over the last 80 years
13:35, commodities have certainly performed
13:36the best, and cash has often limited the
13:38damage.
13:41Stocks, on the other hand, almost always
13:43performed poorly in all these
13:44sub-periods because persistent inflation
13:46generally pushes interest rates up,
13:48which, as a nearly mechanical effect,
13:49depresses stock valuations.
13:53That is why the third lever works better
13:55in the short term: investing in real
13:57assets or other strategies that react
13:59well to inflationary shocks.
14:02The main ones are commodities, which are
14:04investable through ETFs that replicate
14:06diversified indices like the Bloomberg
14:07Commodity Index or similar versions that
14:09are useful especially when inflation is
14:11triggered by energy shocks, as happened
14:13this year.
14:15Then we have inflation-indexed
14:17government bonds, understood both as
14:19individual securities like BTP Italia or
14:21European equivalents and as ETFs that
14:23pool indexed bonds. Here, one might
14:26naturally think, "If they adjust
14:27payments to inflation, I’ve found the
14:29solution."
14:31However, if we look at how they
14:32performed exactly when they were needed
14:33, well, that's not quite the case. Over
14:35the last 5 years, an ETF on Eurozone
14:37indexed bonds is still down by about 4%
14:40.
14:41Certainly, better than nominal bonds,
14:43which are currently still down 13%, but
14:45regardless, if the goal was to cancel
14:47out the effects of inflation on
14:49government bonds, it didn't work.
14:52But why should an inflation-indexed
14:54instrument lose money when inflation
14:56rises?
14:57I mean, it sounds like a life jacket
14:59that works perfectly as long as it
15:01doesn't get wet.
15:02The point is that indexation adjusts the
15:04cash flows to prices, but it doesn't
15:06prevent the market value from falling.
15:08If the real returns required by
15:10investors increase, the price of
15:12previously issued securities decreases.
15:14This doesn't make indexed bonds useless
15:16, but they must be used with the correct
15:18expectations.
15:20A single bond can help me protect my
15:21purchasing power for a future expense on
15:23a specific date.
15:25An ETF, on the other hand, maintains
15:27continuous exposure to those securities
15:29and serves to capture their risk premium
15:31consistently.
15:32But "inflation-indexed" doesn't mean it
15:35always goes up when your bills increase
15:37.
15:38And by the way, there's a cruel irony:
15:40even the revaluation linked to prices is
15:42taxed, so the anti-inflation instrument
15:44ends up paying an inflation tax.
15:47Finally, other options in this category
15:49include trend-following strategies,
15:51which we discussed in this episode, or
15:53stocks in the energy or mining sectors.
15:57Over these last 5 years, commodities,
15:59trend following, and especially energy
16:01sector stocks have performed
16:02exceptionally well.
16:05Commodities have actually yielded as
16:07much as stocks, albeit on a completely
16:09different path, due exclusively to the
16:11two energy shocks of 2022 and this year
16:13.
16:15However, in terms of diversification,
16:17the fact that an asset moves in an
16:18antithetical way to stocks is certainly
16:20a desirable thing.
16:22The fourth lever, finally, strange but
16:24true, is the bond portion of the
16:26portfolio in nominal government bonds.
16:29First of all, because they are taxed at
16:3112.5%instead of 26%.
16:33It may seem like a trivial argument, but
16:36we too often underestimate this glaring
16:38, uniquely Italian distortion that
16:39clearly rewards government bonds,
16:41further legitimizing their place in
16:43portfolios.
16:44And even if they take a hit when
16:46inflation rises, in today's environment
16:48they have three good reasons to exist.
16:50The first is that when real rates are
16:53positive and you have a yield to
16:54maturity, as we do today around 3-4%on
16:57medium durations, it is an
16:58income-generating instrument.
17:01The second is that they still reduce
17:03portfolio volatility, even if less than
17:04they did in the first 20 years of the
17:062000s, when they often balanced major
17:08stock market shocks—less, but not zero.
17:11The third is that inflation can also be
17:13curbed by a severe recession, and this
17:15is the base case in which government
17:17bonds appreciate because, in those
17:19situations, rates generally fall.
17:22Now, short-term rates might fall while
17:24long-term ones might still rise even in
17:26a severe recession if states are too
17:27heavily indebted, but that's a
17:29discussion for another time.
17:33And gold, well, yes and no.
17:36The asset that comes to everyone's mind
17:38first as a hedge against inflation hit
17:40an all-time high of over $ 5,600 an
17:42ounce in January, while today, as I
17:44record this, it is hovering near 4,000.
17:47The decline began right when the war
17:49with Iran started—the very factor that
17:51caused inflation to rise significantly.
17:54Since the beginning of the year, it has
17:56lost about 7%, and from its peak, it has
17:57shed nearly 30%.
17:59Just in the year when inflation has
18:01returned, indeed.
18:03But this is no accident, because gold
18:05does not provide specific protection
18:07against inflation, but it protects us
18:09from other things like fear, crises of
18:11confidence in currencies, uh,
18:12geopolitical shocks of another nature,
18:14and it certainly does a useful job in
18:16portfolio diversification; however, it
18:18does not protect against price increases
18:20from one day to the next.
18:23From 1971 to today, it has generated a
18:25significant real return. In this sense,
18:27yes, it has more than compensated for
18:29inflation, but protecting against
18:31inflation in utility bills is a
18:32different job. Now, having understood
18:35that inflation is a twofold problem
18:36because for the middle class, it remains
18:39difficult to solve solely by relying on
18:41income increases.
18:43And having also understood that there
18:44are tools that can help us counter
18:46inflation, whether on a fiscal level, or
18:48for expected return, or for
18:49diversification characteristics.
18:52Now we must answer this question.
18:56What does it mean for me to protect
18:58myself from inflation? It seems like a
19:00silly question, but in reality, there
19:02are at least two versions of the problem
19:04that lead to completely different
19:05solutions.
19:07The first is to beat inflation over the
19:09long term. Here, history is clear. When
19:11the dust settles, those with more stocks
19:13win, as they have the highest expected
19:15return and, at least in developed
19:17markets over long horizons, have always
19:19generated positive real returns.
19:21If I am a relatively young investor with
19:24a very long time horizon, high human
19:26capital, good risk tolerance, and in
19:28general my goal is to maximize long-term
19:31expected return, then there is little to
19:34say: investing heavily in global stocks
19:36is almost a no-brainer.
19:39Clearly, there are two conditions: I
19:41must invest in a broad, diversified
19:43index and use low-cost, tax-efficient
19:45tools.
19:46Because if I instead invest in stocks at
19:48random, or worse yet, based on my
19:50superior intuition, I have a small
19:52probability of doing much better and a
19:54high probability of doing much worse.
19:57The second solution, however, is a bit
19:59less obvious, and it is to have assets
20:01that remain useful along the way. This
20:03is one of the themes of debunking that I
20:05am most fond of, and to understand it,
20:07three premises are needed.
20:09One, the average expected return of a
20:11portfolio will almost certainly not be
20:13my realized return.
20:16The one realized by me will be at some
20:18point within a spectrum of possible
20:20outcomes that can be clearly better or
20:21clearly worse than the average in
20:23proportion to how volatile my portfolio
20:25is, because the more volatile it is, the
20:27wider the spectrum of possibilities will
20:29be.
20:30Where can I end up?
20:32Second thing, the compound return of a
20:35portfolio corresponds roughly to its
20:37arithmetic mean return minus half the
20:39variance.
20:41So, if I invest in something with a high
20:43average return but also high volatility
20:45, that volatility eats away at my
20:47returns along the way. Let's take an
20:49example.
20:50If I have a portfolio with an expected
20:52average return of 8%and 20%volatility,
20:55and one with an expected average return
20:57of 6%but 5%volatility, the compound
20:59return of both portfolios is similar,
21:01but I achieve the second one with a much
21:03smoother ride.
21:06And what I actually take home is the
21:08compound return, not the arithmetic
21:10average return. Furthermore, I don't
21:12just invest a lump sum at the beginning
21:14and never touch my money again for 30 or
21:1640 years. Along the way, I tend to add
21:18capital little by little, and
21:20occasionally I withdraw some, too.
21:22Consequently, having a volatile
21:24portfolio amplifies sequence of returns
21:26risk; in other words, it's not just the
21:28average compound return of my portfolio
21:31that matters, but also the portfolio's
21:33path and the timing of my cash flows.
21:37You see, in this simulation, both
21:38portfolios have the same median compound
21:40return, but the more volatile one—the
21:42one in yellow—produces much more
21:44dispersed results.
21:46The path that actually happens to me can
21:48be very far from the central case.
21:51Thirdly, in life, we never really know
21:54when we will truly need our money. We
21:56can plan for the short, medium, and long
21:58term as much as we want, but then comes
22:01a layoff, an illness, the right house at
22:03the wrong time, the love of your life,
22:05an unexpected child, or an unforeseen
22:07divorce.
22:08In short, dividing money between short,
22:10medium, and long term is certainly
22:12useful, but thinking that life will
22:14strictly adhere to those deadlines is a
22:16beautiful fantasy. Our plan must be
22:19robust enough to hold up even if we need
22:21the money sooner than we had anticipated
22:23. But what does all this have to do with
22:26inflation? Well, it matters because
22:28inflation has different impacts
22:29depending on whether I have an
22:31all-equity portfolio, or one composed
22:33only of stocks and bonds, versus a
22:34portfolio diversified with real assets
22:36as well.
22:37During demand-side crises, when stocks
22:39fall, bonds rise and act as a cushion,
22:41as happened in the first 20 years of
22:43this century.
22:44With rising inflation, however, this
22:46mechanism breaks down; the benefits of
22:48diversification are reduced, and
22:50portfolio volatility increases, which,
22:52as we just mentioned, is not good for
22:54compound returns.
22:57Now, as a real individual and not an
22:59abstract average entity, the question I
23:01must ask myself is: am I interested in
23:03maximizing my wealth growth in the long
23:05term, or am I instead interested in
23:07preserving the ability to use my money
23:09as much as possible, as often as
23:11possible, and, above all, avoiding the
23:14most adverse scenarios?
23:17Let me put it another way: would I
23:19rather have a high ceiling and a low
23:21floor, or do I want a high floor and a
23:23low ceiling?
23:25Maximizing final capital seems like an
23:27obvious choice, but we must account for
23:29the fact that the marginal utility of
23:31money is diminishing. That is, having a
23:33lot of money or a massive amount of
23:35money changes my life very little, but
23:36having a lot versus very little changes
23:38it quite a bit, doesn't it?
23:40So, reducing adverse scenarios even if
23:42it means giving up more favorable ones
23:45might be exactly what I need, and
23:46therefore I must understand what I want
23:49.
23:51And here we get to the point. Let's
23:53assume we want to choose between two
23:55portfolio models to hold for life.
23:58Portfolio A: 75%global stocks and 25%
24:01global bonds.
24:03Aggressive enough, but with a minimum of
24:05diversification.
24:06This is the portfolio that aims to
24:08maximize the long-term expected return,
24:10my expected terminal wealth.
24:12I could do 100%stocks, but that would be
24:14unrealistic.
24:16Portfolio B: 50%global stocks, 25%
24:19global bonds, 15%gold, 10%commodities.
24:23This is a portfolio that instead aims to
24:25maximize the expected utility of the
24:27portfolio over time.
24:28Now, thanks to the powerful tools of
24:30Portfolio Charts, look at what happens
24:32over 15 years using real returns. I'm
24:35using 15 years because that is the
24:36maximum that Portfolio Charts allows.
24:38You see, Portfolio A has a median return
24:41of 7%, against B which stops at 5.9%,
24:44just as the best-case scenario is
24:46significantly higher, 11.8%versus 8.6%.
24:51If things go very well, Portfolio A
24:53yields much more.
24:55But the interesting thing is what
24:56happens on the floor below.
24:59The 15th percentile return, which we
25:01could consider a conservative
25:02expectation—excluding the most
25:04disastrous scenarios—is much higher for
25:06B, 4.2%versus 2.8%.
25:10And in the worst cases, Portfolio B
25:12yielded double.
25:13Get it? Now, the point is not to prove
25:16that one portfolio is better than
25:17another. Besides, this is a simulation
25:19that should be taken as such anyway. The
25:21point is to understand what we need and
25:23reason accordingly.
25:24Let's say we have been investors for a
25:26few years, are, say, 40 years old, maybe
25:29with 100,000, 200,000, or 500,000 in
25:31invested assets. What do I do?
25:34That is, I must ask myself this question
25:36: what is the goal of my investment? I
25:38must ask myself whether my goal is to
25:40maximize the expected terminal wealth
25:42from here to the next 15-20 years, or to
25:45optimize the utility of my capital over
25:47time.
25:48We will have the opportunity in the
25:49future to go into detail on how to
25:51compose these two types of portfolios,
25:52but today it was essential to understand
25:54two things.
25:55Problem one, inflation makes us pay
25:57twice: once through prices, and a second
26:00time through taxes.
26:01On our salary, where in the middle tax
26:03bracket you need a raise nearly double
26:05the inflation rate just to stay put, and
26:07on savings, where the taxman takes even
26:08the portion of gains needed just to keep
26:10up with prices.
26:12The solution: your salary alone isn't
26:13enough; you need to put your capital to
26:15work, and do it where the tax system
26:16rewards us instead of punishing us.
26:19So, pension funds, accumulating ETFs,
26:21and government bonds taxed at 12.5%.
26:25Problem two: with high inflation, stocks
26:28and bonds tend to fall together, and a
26:30poorly diversified portfolio becomes
26:32more volatile just when we might need
26:34the money.
26:36The solution: first, decide what
26:38protecting yourself from inflation means
26:40to you—either growing your wealth as
26:41much as possible or raising the floor—
26:43and then build your portfolio
26:44accordingly, which in the second case
26:46will also require diversification, for
26:48example with real assets.
26:50But we must not reason in reverse.
26:52We started with inflation at 5.4%, which
26:55on a paycheck requires a 10.2%raise.
26:59Well, we don't choose inflation. Where
27:02do we put our money and what do we want
27:03to protect it from? That, we do choose.
27:05Alright, my friends, that's the end of
27:07today's episode.
27:08I hope you enjoyed it and that it gave
27:10you a useful perspective to think about
27:12the very current topic of inflation and
27:14our Italian fiscal woes with fresh eyes
27:15.
27:17And if you want a weekly update on the
27:19most important market events,
27:20recommended readings, and much more,
27:22sign up for my free newsletter at the
27:24link in the description or by going to
27:27www.debull.it/newsletter.
27:30For this episode, that really is all,
27:33and we'll see each other again in a few
27:35days for a new appointment together,
27:37always right here, naturally, with The
27:39Bull, your personal finance podcast.
27:43A Corax production, social media.

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