Not Investing Will Lose You Money

Well, in purchasing power, not in terms of the number of dollars you have. But the value of your dollars will surely decline. As shown in RetirementSavior.com, from 1920 to the beginning of 2009 the dollar has lost 94% of its value. If you had cash stuffed under your mattress, your safe "investment" would be down to a pittance of its original value.

Think of the countries that have seen their currencies destroyed. Germany and Japan are shown on the chart, but there are other countries that did not understand how to handle inflation. Hungary and Brazil come to mind, while countries like Zimbabwe and Venezuela are current examples of struggling monetary policy. After such extreme devaluation, a person's entire savings is worth nothing but paper.

If you have any excess funds that are not being used, they should be put to work, at least in money market savings accounts or high grade bonds if nothing else. Gold holds its value well over time, but in the long run, it has a 0% return after inflation. Commodities are a direct inflation hedge, while stocks are also good for that purpose.

Contrary to the believe of some people, a rebalanced portfolio of commodities will have a positive return after inflation. Commodity prices are governed by supply and demand, and if the world population is increasing and a growing number of products are made, then the portfolio will have returns after inflation. However, these are like stocks in that they are subject to large swings in value, and would not be appropriate for anything but long term savings.

If you are going to invest your money to preserve or increase the purchasing power, but need to control against downward movements in the markets because of possible liquidity needs, you would need a portfolio that had a standard deviation of around 6% or below, or a maximum acceptable drawdown of around 8-10% at the most.

While short term bonds will meet that criteria of volatility, a better course would be to separate your portfolio into risky and risk-averse portions. This way, you could have better returns than short term bonds with the same amount of risk. So if you have a stock and bond portfolio with an expected 9% return and 10% std. dev., you could separate that from the risk averse portion of money market funds. If the maximum historical drawdown of your risky portion is 25%, then you would allocate 40% of your total portfolio to this, and the rest to a money market fund. You would have higher returns, and you would not lose your purchasing power over time. Or you could use a simple investment model shown in our newsletter section that has provided provide higher returns and lower volatility.

One final word: It is extremely unlikely that the US will ever go through an extreme inflation scenario such as the one shown below. But in hyperinflation scenarios like Hungary, by the end all currency in circulation in the country was worth less than 1 US dollar.

By: Retirement Savior

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