The Third Sure Thing
It has been said that there are only two sure things in life—death and taxes. No one can stop or predict your death. And, we are in this business of Financial Coaching specifically to show you how to avoid, defer, eliminate or reduce your tax burden, through “bright line”, legal, solid, and proven strategies, while optimizing your investment performance. (For a discussion on some of the inappropriate offerings that you must avoid contact us directly).
So what is the third sure thing? First allow me to digress. John Maynard Keynes, who is venerated by some and abhorred by others, nevertheless was a clever and educated person. He said in the “long run, we are all dead.”
That is a truism. Even though it may be a little vacuous. And it may not be exactly true: for many of us, we expect to leave a legacy for our families or for our charities. So the investments need to last, perhaps, several lifetimes.
But how should most of us measure the long run for our investment purposes? For us, I submit it is 20 years or more.
In life, that third sure thing is INFLATION.
No one can stop inflation. Yet, not enough inflation is a bad thing. Think deflation, and the depression.
Too much may be a worse thing. It destroys wealth and income and results in perverse incentives and behaviors. The “right” amount of inflation seems to be in the 2-3% range.
Historically, over the past several centuries, by all measures, in all countries examined, inflation has averaged 3-3.5%. That also has been the average rate of inflation over the past 50 years in the United States when my father purchased his first house.
For the affluent, it has been shown that inflation is even significantly HIGHER than that.
Think about how much more it costs now to consume or to own luxury goods and services. Art, caviar and wine, travel, jewelry, personal security, education, to name a few. (For an analysis that lends support to that ever-increasing rate of inflation for the affluent, contact us directly).
How does the long run relate to inflation? As an example of inflation, my father recently purchased a Lexus. Not the top of the line model, either. In fact, it was the entry level ES 330. He paid twice as much for that car as he did for his first house.
That is inflation’s long-term erosion of your purchasing power. That erosion is inevitable. We must plan for inflation and be prepared for it. We must combat inflation. How?
It is not urban myth: if you took the $24 in Wampum paid for Manhattan Island about 400 years ago, and invested it at 1.8% over the 3.3% rate of inflation (the documented average annual long term rate of return for real estate investments), that investment would now equal the total value of all the real estate on the island.
Even if that is a myth, the point is clear.
(But it is probably true: using a compound interest calculator you can verify for it yourself: $24 at 5.1% annual rate of return, compounded daily, for 400 years yields over $1 Trillion — that is $1 followed by 12 zeroes; in 2004, the City of New York’s own web site of assessed, not actual, real estate value was $169 Billion. But why quibble about only a factor of 10?). Inflation is a major threat, a real threat, to your investments.
Could inflation be the world’s eighth deadly evil?
Well, inflation is the inverse of compound interest. Albert Einstein called compound interest the eighth wonder of the world. Invest so that you harness the power of compound interest to combat inflation and the other risks.
Applying our expertise can help guide you through the maze, and the fog of investing. As a professional, we can help you avoid the big, and costly mistakes. Let us make investing clear and simple. Not easy, but simple.
Let us show you how to achieve market returns, while limiting and managing your risks. Let us help you achieve clarity, comfort, and confidence. Because after all, it is not only how much you make; it is how much you keep.
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