We all share uneasy feelings when it comes to investing and risk. We dislike loosing our hard-earned savings and are more averse to losses than we like profits. We all read the news’ headlines but are non-the wiser when it comes to the stock market’s erratic behavior.
Wasn’t it clear that the 2008 crash would happen with all the leverage in place? Aren’t the markets overvalued after having gained so much? Is there another stock bubble in the making? Are we heading into a global recession? What about all those investment funds that embezzled money: whom can we trust and how could it have happened? Even the 2013 Nobel Prize for Economics had to be shared amongst two opposing and conflicting stock-market theories. We have better things to do than sorting this riddle out. Nah, we keep our cash in a savings account and concentrate on whatever we do best to earn more cash.
But hang on a minute: is this the right thing to do? You know time is your enemy when it comes to inflation. Your savings, for which you work hard, are actually decreasing in terms of purchasing power due to inflation. I urge you to have a look at the CPI Inflation Calculator and play with it. For instance, it shows that $100,000 dollars today has the same buying power as $64,000 did in 1995 (20 years ago). In other words, you would have had to increase your earnings by almost 60% between 1995 and today, just to keep up with your existing lifestyle. Did you earn 60% on your savings account over 20 years?
Did you know?
- Approximately 50% of annual returns of the S&P500 are equal or greater than 15%;
- Approximately 33% of annual returns of the S&P500 are equal or greater than 20%; and
- Approximately 14% of annual returns of the S&P500 are equal or greater than double-digit losses.
In my opinion, the best way to keep up with inflation, especially over 20 years, is investing in successful companies, which services or products often increase in price over time, therefore keeping up with inflation or better. Try not to fall for all the short-term noise, remain calm and foremost be patient. However, when it comes to building your wealth, you have to act now. Timing your investment is a conundrum and your initial investment could go down. By regularly adding a steady amount to your invested capital, you will dampen the effects of any market fluctuations and even out short-term volatility and down years.
So try to think “long-term”, in multiples of 5 years at a time. Pffff, that is a long time and much can happen. Who looks this far out? Well, for one, we could lose a significant amount of buying power due to inflation if we don’t and time… you know it has a habit to slip by unnoticed.