For at least a period of time, lower returns will need to be anticipated. For investors, one set of anchors that will need to be re-set are those around what constitutes a reasonable return for different kinds of assets. We hold them in our attitudes to most things to do with money – how we approach personal debt, for example, or what we consider to be a stable job or industry. This can lead to a belief that Governments should never spend more into an economy that it takes out (which is what a Commonwealth deficit is).Īnchors work on a personal level as well. But the 1980s experience of 12% inflation (which, if it continued, would double prices every 6 years) was so intense that many people remain anchored to the idea that inflation is always a risk. Inflation seems a very remote prospect and inflation in the double digits would be almost impossible. Prices are actually falling, on average, and many people argue that inflation is actually now less of a risk than deflation (the chance that prices will continue to fall in the medium to long-term). For example, we still hear people cautioning that Commonwealth budget deficits are inflationary and thus should be avoided wherever possible – even though the current official inflation rate is actually a negative number (-0.3%, according the ABS figures for June 2020). Life was expensive!įor many people who lived through this time, the combined experience of high inflation and high interest rates is an anchor that continues to impact their thinking about debt and the general state of the economy. To take just one piece of information from that time: during the 1980s the official inflation measure – the Consumer Price Index, or CPI – had risen as high as 12% per year and had rarely dipped below 5%. It was the early 1990s and followed a period in which many elements of the economy had become quite ugly. It leads to what is known as the ‘anchoring bias,’ where we continue to base our thoughts and expectations on information that has become outdated.Īs an example, some people remember well Australia’s last economic recession. We will all need to think differently when it comes to our finances.Ī ‘working assumption’ is sometimes described as a cognitive ‘anchor.’ The term anchor describes how previous information can hold us back, by stopping us from moving away from that information even if that previous information is no longer relevant. The new world will not be like the old world. While no one really knows what the lasting economic impact of the Coronavirus will be, the one thing that we can be certain about is that many of our working assumptions will need to be changed. Given the events of 2020, how we think about money has become even more vital. The ‘mental side’ of money management is always important.
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