Monday, April 13, 2020; 2:20 pm CST
Dear Friends, Family and Clients,
Fluctuations Isn't Loss
What we need to bring to your attention, that is, to the person who is trying to avoid (temporary) losses in the market, is simply to know there are ultimately only two things you can do with your capital. You can save it; or you can invest it.
The great thing about savings bank accounts, certificate of deposits, Treasury bills, money market funds that are prices at $1.00, is that your principle stays virtually constant all the time.
There's tremendous emotional comfort in knowing that the number of dollars you had yesterday is the same number that you have today, and that it will be the same number tomorrow.
And you pay a truly terrible price for that emotional comfort. In fact, if you live long enough, you will pay a fatal price. It's simply that savings virtually always produces a negative return, after you account for inflation and taxes. In other words, your savings are always losing value, but you see that only when you understand what value really is. And what it isn't.
Value isn't implicit in the number of units of currency you have. It's implicit in what the currency will buy. If the prices of everything you need are constantly rising, this is another way of saying your paper dollars are declining in value. The denominator is getting smaller.
Currency is not, in it of itself, a store of value.
Conversely, when prices are falling, this could also be expressed by saying the the paper dollars are strengthening in value, as in the case of recessions when prices typically fall. The denominator is getting larger or more valuable.
For example if you pay $0.55 today for a stamp that cost $.08 cents in 1971,is another way of saying your paper dollars and savings are declining in value because you need more of them to buy the same amount of goods.
To truly store value - to obtain a return that's positive after inflation and taxes, you need investments as distinguished from savings.
And that's a great thing about investments. By investments, I mean owning shares in America's great companies. Over time, these shares keep you ahead of inflation and taxes.
But you have a pay a price for that too. The price is that the dollar value of the investments fluctuates... up mostly, but down once in a while like see today. The most important thing to remember is that fluctuation isn't a loss; unless you choose to make it so, with the panicky decision to sell. Selling mutual funds and stocks feels good today as "it ends the pain". But you will feel differently in retirement.
In January 1980, when I started in this business, the Dow Jones Industrial average traded around 824. In February of 2020, it touched 29,587 if only for a moment.
What really has been the greatest risk of this time period? The Crash of 1987? The Gulf Wars? The Internet bubble bursting? The Great Recession of 2008?
I say it was not owning shares in companies or mutual funds. And when was the right to buy them? Yes: Whenever you have the money.
Never mistake savings for investments. And, above all, never mistake your paper dollars for a long-term storage value, because they just aren't.  When your grocery bill this month is higher than it was last year at this time, you know that your dollars have lost some value.
But the grocery store company shareholders got increasing dividend checks or an increase in share prices didn't they?
Chances are those dividends had plenty of temporary fluctuations in between.
They've seen the value of their shares rise over time as well...and they deserve to... after all, their investors.
Call us at 847-686-4800 to schedule an assessment of your investments and how to best keep up with inflation, a.k.a. higher prices at the grocery store.
Respectfully,
Bill
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