Making The Decision Not To Invest is More Expensive Than You Might Think
By Anthony Rhodes
One of the most sustaining memories that I have
about the effects of inflation and investing occurred many years ago, when
I called a prospective client with the intent of selling some newly issued
corporate bonds. The older lady on the other side of the phone, having never
invested before, seemed a bit intrigued about the product, and wanted me to
explain in detail exactly how bonds worked. After a pretty lengthy conversation
about securities, safety and the investment process in general, she concluded
this to be a pretty good opportunity, and decided to come into the office to
open an account. Upon completing the necessary paperwork, and answering a few
last minute questions that she had, we moved to the issue of account funding;
as I had no idea of exactly how many bonds she hoped to purchase. In a very
cavalier fashion, the lady reached over and pulled out a Wonder bread bag full
of $100 bills, and proceeded to align them uniformly in stacks of ten. The
sight being so unusual to me, I asked her if she had just come back from the
bank, and the cold stare that she returned became an opening prelude to the fascinating
story, which followed. I later learned her to be a survivor of the worst
economic disaster in American history: The Great Depression. Her father, like
many others of the time, had lost all of the family’s money when the banks
collapsed, and the cascading effects wreaked economic and emotional havoc on
the horrific years which ensued. This traumatic experience so profoundly
affected her, that at the age of 12, she began the habit of saving a portion of
her money in bread bags, in lieu of the bank, and had continued to do so ever
since. The small fortune which she had amassed amounted to over $450,000 and
although she spoke proudly about her ability to procure such a substantial
total, I couldn’t help but think of the untold sums of money which she had lost
over her 53 years of saving. Not only did she forego hundreds of thousands of
dollars of investment profits, but because of the inflationary effect on her
money, had lost tens of thousands more due to the erosion of her dollars’
purchasing power over all those years. By even a conservative estimate, her
total should have been well over 1 million dollars.
This story, (which I affectionately call My
Adventure with Wonder Woman) should serve as a precaution to those of you
with the means to invest, but due to fear or lack of understanding, are
refusing to do so. It’s not enough for you to simply horde your money in an
attempt to protect it and keep it safe, but you must understand that in order
to maintain its full purchasing power, money has no choice but to grow.
Otherwise, the effects of inflation will continue to chip away at it,
bit-by-bit, year-by-year. In the final installation of this series, I’ll
attempt further to point out the importance of this unsettling reality. And
hopefully, at its conclusion, some of you will wisely proclaim those sideline
seats to be simply too expensive to afford.
Your Weapon In A Pinch
If you take a serious, objective look at the nature
of business, you would find investing to be the greatest protective measure
that you have as a consumer to defend against the inevitability of raising
prices. This not only includes the usual inflationary increases brought on by
high consumer demand, but also involves the familiar tactic of “pinching the
little guy” which companies employ to help pay for a variety of different
corporate situations. For example, if a company has to payout a hefty claim due
to a legal decree, they might just raise prices. If a union dispute disrupts a
companies’ supply chain operations, they might just raise prices. Even if a
company acquires its chief competitive rival, they might just raise prices. In
fact, this strategy of ‘pinching’ can go on and on from company to company, and
before you know it, items which you use every day can cost 15 to 20 percent more
than they did just one year ago! This does not bode well for the non-investor.
And adding a COLA (Cost Of Living Adjustment) pay increase won’t completely
compensate for the difference either. No, there’s just no getting around it;
investing is the only defensive measure that you have to ‘pinch’ back when
companies put on the squeeze. And for those of you who are waiting for such
actions to decrease, or to stop altogether, I would strongly advise you not to
hold your breath in anticipation of them doing so.
Staring Down A Loaded Barrel
The Middle East oil crisis of the 1970’s taught us
a very valuable lesson on how dependent, and susceptible we are to the whims of
major oil producing nations. Over that period of time, Americans experienced
the price of a barrel of oil skyrocket 19 times higher than it was at the
beginning of the decade! And while current technological realities make a
repeat of such actions less likely to transpire, more recent price fluctuations
continue to remind us of the controlling powers possessed by the members of
OPEC, and of the undeniable effect, which it has on our state of finances.
Attempting to cope with this reality without investing, means that one would
increasingly have to resort to the “robbing Peter to pay Paul” method of money
management, whenever a substantial raise in gas prices takes place. Not only is
such a method unwise, but more importantly, it doesn’t fix the problem!
Borrowing from one source to pay for another only postpones the inevitable, and
sooner or later that chicken will come home to roost. The proceeds, which one
generates through their investments, could certainly help augment the price
differential created whenever OPEC decides to shorten the oil supply. And,
speaking as a person who hates the idea of anyone having that much control over
my finances, provides a psychological defense against such activities, as
well.
Of all the many benefits, which one receives
through investing, perhaps the most important, and rewarding, is that of
choice. Long-term investors possess a disproportionate amount of choices when
compared to non-investors, and the advantages of those choices continue to
widen the divide between the haves and the have-nots. I say this not as a
subject for analysis, reasoning or debate, but as a statement of fact. There
are simply more options available to individuals who invest, and if one would
like the same options to be made available to him or her, they need only
involve themselves in the process as well. I hope these words stay with you as
you contemplate your decision on whether or not to become an investor. And if
your final decision is non-participation, such a conclusion is in fact, your
choice. Though I would ask you to use it sparingly, for as a non-investor, they
will be in short supply.
(Anthony Rhodes is a
Registered Investment Advisor and owner of wealth management firm The Planning
Perspective www.theplanningperspective.com)
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