Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Inflation

Since I spend a decent amount of time online there's always a chance I'll stumble upon something good once in awhile.  Today was one of those days. In doing a little research on inflation I found a rather rudimentary inflation calculator on http://www.westegg.com/inflation/.  It's super simple and allows you to put in a dollar amount and previous year then calculates what it would take in today's dollars to have the same purchasing power.

For example, going back to 1900 if you had $2,000 it would be the equivalent of $51,707.89 as of January 1, 2011.  Pretty cool, right?

So how is this practical and what does it tell us?

Inflation is actually the single greatest reason people have more money in terms of dollars than anything else.  More important than the investment results of stocks, real estate, CDs, etc.  In my example, if an investor grew their money at the same rate of inflation alone they would have grown their money by over 250 times (about 3% annualized).  To put that in perspective, if an investor got just the return of the stock market for the last 100 years their money would have grown at an annualized rate of just 5.3% (source: http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average).

So the same $2,000 growing at 5.3% per year would be worth $617,417.87.

This may seem like a big difference, but inflation was roughly 3% during the same time period.  So roughly 60% of all stock market gains the last 100+ years was actually due to inflation.  Only 2.3% was due to actual economic growth in a country that grew more in the last 100 years than any other in the world - and cemented itself as the world economic leader.

Probably a scarier statistic is that most investors do not get performance that is even close to that of the stock market.  In a fairly recent study by Dalbar and Associates they found that over a 20 year time period (1985 to 2005) the average individual investor got roughly 33% of the S&P 500's return.  If those same metrics were true for investors over the last 110 years, the average investor would have actually grown their money at a rate of roughly 1.75% per year.

Studies show over and over that most investors returns get gobbled up by taxes, fees, and poor decision making influenced more by emotions than facts.  I call those things The Wall Street System.

And 1.6% per year the last 110 years would have turned $2,000 into a paltry $13,704.92.

I think this is particularly important today because we may be looking at some of the highest inflation in the next 20 years that we've seen in the United States since the 1970's.  And if investors don't manage to do better in the future than they have in the past - a lot of people who thought they were in a strong financial footing could find themselves in the poorhouse (relatively speaking).

Over the past 10 years I've done a fair amount of public speaking on the topic of investing.  One thing I almost always finish with is the question "Are you 100% confident you are doing the best you can with the resources you have?"  While I know the answer for most people who are honest with themselves is "no", very few people actually take action to do something about it.  It's almost as if people think if they ignore the issue it will just go away.

Bust statistics are important.  And knowing that the majority of people will knowingly ignore their investing shortcomings bothers me to no end.  Are you in the "ignore the facts" group?  I hope not.

I think it's fitting to end this weeks post with that same old question I ask over and over again: Are you 100% confident you are doing the best you can with the resources you have?

If you're not sure, drop me an email at support[at]jasonwenk.com.  While I can't personally help the thousands that read my books or attend my speaking events, maybe I can help point you in the right direction.

Cheers,

Jason Wenk

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