3 Things 5-31
Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it.
Inflation And Investing
If you pay any attention at all to the financial news you’ve undoubtedly seen or read about the current wave of inflation. And you’ll also be aware that the great debate happening around that subject is whether the inflation we are experiencing is transitory or not. There are, of course, lots of experts weighing in on both sides. Only time will tell us which ones were right, but in the meantime, we would be well advised to at least consider the investment vehicle that has historically afforded us with the best offset to inflation.
Before we do that it might be worth reminding ourselves just how important it is to pay attention to the effects of inflation. The last official reading on May 12 put the rate at 4.16%. Since inflation erodes the purchasing power of a dollar over time, let’s look at the impact of the current rate on the prices of a few items over twenty years. As you can see (below), a lawnmower that costs $350 today would cost $790 in twenty years, a refrigerator that costs $1,200 today would cost $2,700, and a car that costs $30,000 today would cost $68,000. Stated another way, the original $350, $1,200, and $30,000 would have the purchasing power of $154, $528, and $13,200 respectively. Stated one more way, a dollar today would be worth forty-four cents twenty years from now!
The only way to avoid that extreme loss of purchasing power is to invest in assets that provide a real return (total return minus inflation) of zero or better. History has shown us that the asset class that provides the best real return (inflation buffer) over time is stocks. A study done on the holding period between 1926 and 2017 showed the S&P 500 had an annualized return of 10.2% while the same return for long-term government bonds was 5.89%. Inflation over that time averaged 2.89% so both asset classes had positive real returns but stocks, at 7.31% versus bonds at 3%, were the clear winner.
Using just the lawnmower example from above to illustrate the point, if we invested the $350 needed to buy the mower for twenty years at the real rate of return for bonds (3%), we’d have $632. That would leave us around $160 short of being able to purchase the mower in 2041. If we invested that $350 in the S&P instead, assuming the 7.31% rate of return we would have $1,435. We could buy the price-inflated mower at $790 and still have $645 left over.
The bottom line is, if you’re worried about inflation and you have the money and the time/patience, stocks should be a part of your investment plan.
Thing Two Ayn Rand Strikes A Nerve The comments keep coming from readers of the newsletter. The one I’m highlighting today is from a friend and client who commented favorably on last week’s edition but also pointed out that he was not a real fan of Ayn Rand, who was quoted in last week’s, Just A Thought. His distaste for Ms. Rand was rooted in her anti-religious stance and also in the fact that (apparently) one of her books, The Fountainhead is considered a manifesto of sorts for one of the political parties (the less popular one). Before I comment on what I think about the idea of her philosophy (sans all the anti-god stuff) being a manifesto for a political party in America, let me quote the Ayn Rand Society on the essence of her philosophy: “The essential advice of Rand’s philosophy is to embrace reason as an absolute. This means: choose to face the facts at all times, in all areas, whether at work or at home, in business or in love — and no matter what conclusion logically ensues, whether pleasant or unpleasant…The purpose of epistemology is to help teach us how to reason: how to think conceptually, how to properly define our terms, how to form and apply principles…Reason doesn’t work automatically. We have to choose to activate our minds, to set them in motion, to direct them to the task of understanding the facts, and to actively perform the steps that such understanding requires. Our basic choice in life is “to think or not.” As to my take on whether this aligns with a particular American political party, I’d have to say, it would be great if it did, but I don’t see any evidence that either is encouraging us to think. The good news is we can do it anyway.
Thing Three Just A Thought "This is the day we pay homage to all those who didn’t come home. This is not Veterans Day, it’s not a celebration, it is a day of solemn contemplation over the cost of freedom." - Tamara Bolton