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The Hidden Enemy of Investors: Inflation
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Most investors today tend to invest in passive products. These typical products include Index Funds, and ETFs. They are commonly called Mutual Funds. All of these products are offered in employer’s 401K plans. Most folk’s use these not because they offer the higher gains but because they are commonly advertised and your only option within a 401K plan that is offered. But most often they are used because most individuals lack of an understanding of financial investing knowledge. Thus, these are used because you need no knowledge. Just put your money into them and forget them for years until you either are ready to retire or there is a major fall in the overall stock market. It is rather unfortunate but this is actual reality.
Let’s
stop and think about why you invest in the first place. Most invest because they
want to retire in comfort some day. Most financial planner uses a standard
formula. They subtract your current age from 100 to figure out what percentage
of your assets should be allocated to equities and bonds. For example say you
are 60 years old. Thus, 40% should go into an Equity Mutual Fund and 60% into a
Bond Mutual Fund. However, there are a number of problems with the approach.
First, folks are living on average three more years today than compared to
twenty years ago when they came up with the approach. Second, in say 1980 a bond
paid around 10.0% and today a ten year T-Bill only pays around 2.85%. Third,
since our life expectancy is longer we have more years to invest. Recent studies
conclude that the new average life expectancy for Americans is 78.7 years.
Fourth, which we think is the most important, is the losing race with inflation.
Inflation is the hidden enemy of all investors.
Thus, let's explore the hidden enemy in more depth by looking at the average inflation rate over the past 9.7 years.
2009 = -0.4%,
2010 = 1.6%,
2011= 3.2%,
2012= 2.1%,
2013= 1.5%
2014= 1.6%,
2015= 0.1%,
2016= 1.3%,
2017= 2.1%
2018 (January to July average) = 2.54%.
The chart below indicates the long term average annual inflation is 3.18% (highlighted in yellow) from 1913 to 2015. Using the rates by Decade, you see the highest was 1913 to 1919 at 9.8%.
Most investor do not realize the damage inflation does to their investments. The entire purpose of investing is to invest in order to beat inflation. That is why you must invest in equities (individual stocks). Because individual stocks typically can earn higher rates in gains compared to other investments. Why do you think Warren Buffett invest in equities?
The chart below shows the cumulative impact of inflation of about 2,326.58% from 1910 to 2015.
This chart tells the true story about the enemy – inflation. Inflation decreases the buying power or worth of your dollars over time. Most individuals never stop to think about this concept and the negative role it plays regarding your finances. And sadly, most investment salesmen purposely never mention it either. This is why a house bought in 1968 cost about $30,000 and today it will cost you about $250,000. And why it cost $3,000 to buy a new compact car in 1972 compared to about $25,000 today. You have to earn more than these rates to beat inflation.
You must invest to beat inflation to maintain your buying power. But how is this done? You must invest in equities, specifically in individual stocks.
For comparison purposes let’s look at some 10 year numbers. The inflation rate for the past:
10 years= 16.63%
And here are some Mutual Funds rates for 10 years reflective of the overall markets:
S&P500 (SPX): 10Yr= 8.12%
DJIA (INDU): 10Yr= 8.13%
You can see that these do not beat inflation meaning that you have to do better than the overall market. And Mutual Funds are designed to track the overall market, thus, the problem with just investing in Mutual Funds, as you will see below.
Now let’s take a look at a few randomly selected Mutual Funds that include two S&P 500 Index Funds, and a Midcap ETF.
Vanguard S&P500 Index Fund (VFINX): 10Yr= 10.04%
Russell Midcap Pure Growth ETF (PXMG): 10Yr= 8.97%
Schwab S&P500 Index Fund (SWPPX): 10Yr= 10.13%
These three Mutual Funds did not beat the inflation rate of 16.63%. As you can see these do not beat inflation either. Granted, you can argue about the actual inflation rate. Which does vary. But, you can't argue with the damage it does to your investments. Meaning you have to do better than a Mutual Fund products. Therefore, the reason you have to invest in individual stocks is to beat inflation. Now, that does not mean you have to put all of your capital into individual stocks. But, you should allocate enough capital to individual stocks rather than Mutual Funds to beat inflation.
At Port Wren Capital, LLC, we discovered these facts a while ago and this is why we invest our own capital in individual stocks rather than Mutual Funds. We used to invest in Mutual Funds until we learned more about the damage of the hidden enemy – inflation. Odds are you have not been beating inflation over the past 10 years. So contact us to learn more about having a hedge against the hidden enemy today.
At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.
Published: 10/1/18
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