What will happen when inflation comes and why you shouldn’t buy a new Ferrari
Something very apparent in L.A. is the number of young people driving around in half a million-dollar Ferraris. Maybe this is their business plan, which requires the use of a Ferrari to generate Instagram hits, but with L.A. traffic, plenty of traffic lights, and nowhere to go in a pandemic, the utility of a Ferrari becomes less apparent. What else can a young person do with their money? Here are some implications when making the wrong decision.
No question L.A. culture involves high use of depreciable assets, including expensive cars, but with rising stocks and house prices, it may be reasonable to suggest that young people should give up the expensive car and instead focus on assets that are likely to appreciate over time, such as a home of their own and an investment portfolio. The Maserati Quattroporte sedan loses an average of 72.2% of its original worth after the first five years.^1 Meanwhile, the S&P 500 has increased 564% since the 2009 bottom and the 10-year average return is 13.6%.
The 2009 Great Financial Crisis changed how the game was played. Traditionally, stocks appreciated with inflation. Not today; markets go up, meanwhile, the cost of goods remains the same or declines. The average price of a new Ferrari 448 dropped from $300k in 2017 to $270k today^2. Price differentials of this nature will not be sustainable once inflation arrives and it will be the wake-up call of a lifetime to those who allocate their resources on lifestyle assets over investments.
Inflation could show up quickly; plausibly due to supply chain issues, weak labor supply, government stimulus, and the evolving trade war with the world’s largest manufacturer, China. In this environment, there will be notable volatility, but asset prices may likely continue to appreciate. Those who are not invested may feel the biggest hit as consumer prices around them increase but their net worth does not.
Young people who grew up in this environment don’t have the benefit of history. They may wake up to a world with forever higher prices unable to catch-up as they have decided on a Ferrari over a house.
At Eureka Wealth Management, I help my clients build up their investments which may put them in a better position to survive inflation while supporting their vision for the quality of life that they seek. I also do tax/estate planning and insurance. Call for a free consultation at (760) 537-0791 or online at eurekawealthmanagement.com.