Scared Stockless: What Investors Need to Consider
Nov 03, 2011 |
Some truly risk adverse investors are afraid of stocks. In fact, the recent run-up in our stock market is believed to be due more to professional investors putting their money to work than individuals. This is easy to understand when we look back to the 2008/early 2009 fiasco.
However, fear of risk in the form of stocks does not benefit an investor historically. This is because stocks are the only asset class that has consistently delivered returns above inflation long term. Of course, past performance is not an indicator of the future, but still it is hard to ignore. This is especially true since we know we can expect to see inflation again. We just don’t know when.
Inflation burns into the value of a dollar.
Here is another way to look at this issue. When prices rise, we have no choice but to pay them, at least for food, housing and transportation. These are consumer staples. If our incomes don’t rise to meet the challenge, we are in trouble.
For example, let’s say inflation is 4% instead of the less-than-3% it is now. Using this figure and projecting its real value 10 years forward, we would pay $148 instead of $100 for the same goods and services. Compare this to the current lower 3% inflation; here the increase in cost would be less, to $134. It could get worse. Assume inflation doesn’t stop at 4% but goes up to 6%. Then, 10 years hence we would have to pay $179 instead of $100 to buy the same thing.
The scenarios above are especially compelling for retirees who live on a relatively set income. They don’t have a salary increase commensurate with inflation. Therefore, they have to figure out a strategy to keep up with price increases. One way is to own stocks — many specialists say a minimum of 20% — even in retirement.
For further reading:
A Rising Tide Lifts All Boats (and Some Egos). Momentum accounts for 75% of market gain; those not invested in any stocks miss this upward push.