Inflation is on the way. The bond market is telling us so. The rapid decline in the dollar over the last month is telling us so. And common sense is telling us so. This does not have to be hyper-inflation where we will be taking sacks of cash to the grocery store. Anything over 3% per year can silently rob your dignity in retirement by eating away at the purchasing power of your fixed income streams that so many advisors make sure you own.
Stocks of Great Companies are a Hedge Against Inflation.
Always remember that stocks are our only diversifiable defense against the erosion of our purchasing power in the future. The real retirement time bomb lurking now, just as retirement periods get longer due to increasing life expectancies, is the mounting irrational fear that the stock market is too risky.
Where did that idea come from? I wonder. It's the memory of the short-term volatility (see below).
This misapprehension originates in a person's early life, and specifically in the worldview absorbed from their parents. For instance, in describing her father, my mother in law has often explained to us that we will never know what it's like to have it all, and then have it all taken away. Her father was driven to school by a driver in a limo in his youth. Then, suddenly, his family lost everything in the crash of 1929, not because stock prices went down, but because the family was forced to sell assets near the bottom to meet margin debt calls from its brokers, who in turn were getting calls from their banks, who in turn were getting calls from their depositors for cash. It wasn't stocks that doomed my wife's grandfather's family; debt took everything away.
People usually define their concepts of financial risk and safety only in terms of principal, loss of value, whereas it's a matter of financial life (and death) that they learn, before it's too late, to see that the real risk is the erosion of purchasing power. They fear that they will lose their money. That's a risk which, over a 30 year period, is historically nonexistent. What they should fear is the risk that they will outlive their money.
The cost-of-living has never, in the 62 years of a typical retiree's life, stopped going up. The only reasonable assumption that we can make is that the cost-of-living will never stop going up. Take a look at the stamps below. The two 3 cents stamps on the left were issued 62 years ago; the two on the right were issued last year at 42 cents. That means that the cost of a stamp has increased by more than +4% per year for the 62 years of the 2008 retiree's life.
That's why bonds or annuities are not the main answer for the long-term. By producing fixed payments from a fixed asset (not adjusted for inflation), bonds are considered conservative investments. But the only thing that they are conserving is a fixed amount of paper dollars whose purchasing power is constantly eroding. Bonds may be conservative of principal, but they are relentlessly destructive of purchasing power.
And again we come down to time and perspective. Financial journalists in their obsessive quest for viewers and readers, at the expense of good advice and truth, only report what's going on right this minute or what just happened by hyping every historical, rear-view mirror economic and market statistic. This is why we recommend that you simply turn off CNBC. It robs you of the ability to think through time. This leads people to confuse risk with volatility, a critical mistake. Our job is to help you match the long-term historical perspective of the returns of shares of great companies with the realties of your long-term plans.
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