We all want to become wealthier over time. The guaranteed method for doing this is hugely unpopular. It requires deferred gratification.
Spending less than you earn on an after-tax basis seems almost un-American these days.
Almost all government programs and stimulus initiatives have been geared towards transferring money from prudent savers to recipients who will spend their checks immediately. Economists’ theoretical economic multiplier effect depends on this.
Federal Reserve policy here in the U.S., European Central Bank (ECB) actions and the workings of the Bank of Japan (BOJ) are all focused on the dubious goal of creating inflation. The powers that be are determined to see higher prices on everything you need.
Growing real, rather than nominal, wealth means first overcoming the stagger of decreased purchasing power. Our Bureau of Labor Statistics (BLS) keeps the official CPI numbers. Their certified, but probably understated, calculation shows that it takes $1,483.58 today to buy what $1,000 could purchase in 1996.
Inflation Calculator from BLS.gov
You needed to earn 48.36% after-tax just to preserve your buying power.
Many people use charts of the DJIA and S&P 500 to discredit equity investing. They often choose artificially overpriced starting points like 1929 or 1999 to illustrate why buying stocks was ineffective.
Presenting an index value without reinvested dividends is meaningless. Imagine someone giving you that same information on a fixed-income portfolio without showing interest earned and compounded. In that scenario every bond, bought at par then held to maturity, would show a 0% return.
Seen in the proper light, the chart below appears much better than it appears at first glance. From year-end 1995 through May 6, 2013 the SPY's nominal growth was greater than 50% while its total return was 189.3%. Even from the internet-crazed end of 1999 the SPY showed a positive 10.4% in non-adjusted terms and 31.8% with dividends reinvested.
Those fine returns certainly doesn’t jump at you when you glance at Perma-Bear Robert Shiller’s chart which is meant to discredit long term investment in stocks.
I added the total return data to counteract his intended purpose.
Bank certificates of deposit, treasury bonds and money markets offer almost a zero chance of preserving your wealth. They are pretty much guaranteed to destroy purchasing power due to inflation.
Stocks have produced respectable returns despite the tech bubble, terrorist attacks, the housing bust and 2008’s financial meltdown.
We live in a TINA (There Is No Alternative) world right now. Equities are not particularly expensive on a historical basis. They are even more attractive relative to all other choices.
Don’t get eaten by the bears.
See my value investing portfolio and articles here http://marketshadows.com/virtual-portfolios/virtual-portfolio/
Disclosure: Long a diversified portfolio of high-quality stocks, I own no fixed-income products
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