3 Things 9-12
Thing One The Price Of Government Solutions Did you know that in 2020, prior to the global pandemic that put a strain on supply global supply chains, the price of a car was almost the same now as it was twenty years ago? Did you know the same held true for a TV? Interestingly the prices of most of the things (pre-pandemic) had either come down or had not gone up nearly as much as you might have thought. You’ll see that for yourself when you look at the chart below. But you’ll have to keep in mind that I said most things. There is one category, the things in which the government gets heavily involved, where that observation can be stated in the opposite. When the government takes over, costs go up, despite all the good intentions and noble-sounding names attached to the various programs their efforts produce. I’ve already mentioned how close to the ~twenty-years-ago price a car and a TV are but you can see that for yourself below and you can also see how far away from that same ~twenty-years-ago price healthcare and education are. During a period where cumulative average inflation was 59%, healthcare and education prices increased by 220% and 188% respectively. That is owing in large part to government intervention, which tends to minimize competition. For example, the good-intentioned “Healthcare Marketplace” which is the central feature of the noble-sounding Patient Protection And Affordable Care Act, is not a marketplace at all. It’s just a government website where you can go apply for an insurance policy. There are no insurers out there vying for your business based on your specific needs. As a result, prices have gone up - significantly - every year the marketplace has been in existence. And I don’t need to tell anybody reading this about what has happened to the cost of a college education. Why does all this happen? It’s simple. Where the government intervenes, competition usually dies. And when competition dies, prices rise. Despite how this may sound, this is not an anti-government rant. We need government for sure as there are things best left to be done by a central body. But we also need a thriving private sector. One that provides the opportunity for companies and, yes, people to grow rich. We don't have to look hard or far to find examples of the misery that is evident in countries whose governments haven't adopted this philosophy. There's a reason people are clamoring to come here. We shouldn't forget that.
Thing Two 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 has “peaked” 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 August 10 put the rate at 8.5%. 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. Instead of assuming an 8.5% annual rate though, we’ll assume inflation actually has peaked and will average about half of that (4.25%) over the next 20 years. As you can see (below), a lawnmower that costs $360 today would cost $830 in twenty years, a refrigerator that costs $1,200 today would cost $2,800, and a car that costs $48,000 today would cost $110,000. Stated another way, the original $360, $1,200, and $48,000 would have the purchasing power of $155, $516, and $20,640 respectively. Stated one more way, a dollar today would be worth forty-three 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. Of course, inflation is running higher now. Those real returns for stocks and bonds would be reduced to 5.95% and 1.64% respectively if we plug in our assumed 4.25% rate of inflation going forward. Using just the lawnmower example from above to illustrate the point, if we invested the $360 needed to buy the mower for twenty years at the real rate of return for bonds (1.64%), we’d have $498. That would leave us around $332 short of being able to purchase the mower in 2042. If we invested that $350 in the S&P instead, assuming the 5.95% real rate of return we would have $1143. We could buy the price-inflated mower at $830 and still have $313 left over. The bottom line is, if you’re worried about inflation and you have the money and the time/patience, stocks/stock funds should be a part of your investment plan.
Thing Three Just A Thought “We are kept from our goal not buy obstacles, but by clear path to a lesser goal.” - Bhagavad Gita