We don’t know what tomorrow holds for the market. The market doesn’t know what tomorrow holds. That’s why the market reacts in a certain way because of surprises to the market. One other thing I want to add to this and then I’ll circle back around but the “4% rule.” Use that as kind of a benchmark. There is no such thing as a one-decision solution for investing or for retirement planning. There’s not “a one product thing” that you can buy that’s always going to work and you can say “This is the way it’s gonna go. It’s never going to change.” Investing and portfolio management and retirement planning… It’s all dynamic. It has to take into account what’s going on in the market, and what’s going on in your life. It has to be a living, breathing thing and it has to be robust and nimble.
We talk about these kinds of problems in terms of investing money and trying to stay ahead of the things that would degrade purchasing power.
What do you think are some of the most important things regarding investing in that context for your “A” game?
When you think about inflation and what inflation does, it basically erodes your purchasing power if your money is sitting as is or is not earning more than the rate of inflation. One of the main purposes of investing is to not just keep up with inflation but to do better than inflation. That way you can maintain your quality of life and perhaps even enhance your quality of life. We know that if your money is in a fixed income are fixed interest rate security, during times of inflation, then your money is not necessarily doing better than inflation, especially if the rate of inflation is higher than the rate of interest that you’re receiving. One of the best asset classes to invest in during such times and has been for during if you go back if you go back over the last 100 years, stocks tend to keep up with inflation and do much better than inflation. Over the last 50 years, inflation has run at about three and a half percent, but just the s&p 500, for example, has performed much better than that it’s returned close to 10% over that period. So common stocks are one of the best ways to maintain your purchasing power.
What do you attribute that to? Why do you think that’s the case?
There are different ways of looking at it. When you think about what a company is… a company is assets. A company owns assets, and then a company also owes liabilities that’s basically a balance sheet. One side has assets and the other side has liabilities. Real Assets tend to keep up with inflation. So in an inflationary environment, the asset side of your balance sheet is actually keeping up with inflation.
The reason for that is because the replacement cost of it is continually climbing. That would typically be hard assets, like real estate.
But what about the deployment of those assets in a profitable manner?
That’s one of the main reasons why common stocks and companies tend to do well over time. The assets that they own earn a return which means that whatever these assets may there could be intellectual property. These assets are not just sitting there, they are generating returns. So that overtime does better than inflation. Companies also have the ability to raise their prices during inflationary environments and make decisions affecting their bottom line.
Listen to the full episode for this topic and more.
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