Virtually everything costs more these days. Many of you may recall the so-called five and dimes of years gone by. Some may have even shopped at the legendary S. S. Kresge, which eventually evolved into Kmart. But those days are long gone. Today we have the ubiquitous dollar stores which are scattered along roadways across the landscape. And they have already outlived the dollar store identity. Now they’re charging three, four, even five dollars or more. Good luck finding something worthwhile for a dollar.
You would have to spend about $100 today to buy what would have cost just $11.74 in 1970. That’s according to the Federal Reserve Bank of Minneapolis. Quite clearly, the purchasing power of the dollar has eroded significantly over the years. If you were ultra conservative in the ’70s and buried that $11.74 in your back yard, you’d probably have to pay more than $11.74 for a shovel to dig it up.
Instead of burying that money, however, if you had deposited it into a bank at a modest 3 percent interest rate, you’d have in excess of $80 today. Not a spectacular amount, but likely enough to buy six new shovels.
The reality is that, almost no matter what you do with your dollars, they’re going to lose purchasing power as time goes by. That’s why, even with up and down, roller coaster markets, investing provides the best opportunities to maintain your purchasing power over time.
Of course, you have to invest wisely and carefully. Because all investments carry an element of risk. Your principal is considered “safe” when sitting in a bank. But bank deposits simply fail to keep pace with inflation over time. The principal may go up, but purchasing power does not.
Bonds are also considered to be safe. But many fail to understand that rising interest rates put downward pressure on bond prices. So, you can lose money with bonds too.
And then there are stocks. Yes, your principal is at risk and can fluctuate virtually every business day. But generally, and by most measures, even with its ups and downs, a diversified stock portfolio has maintained its purchasing power over extended periods of time.
I would be remiss if I didn’t mention cryptocurrencies, which currently are not regulated, and commodities, such as gold and silver. One thing can be said about all cryptos and precious metals. They tend to be volatile and have seen some extreme fluctuations of late.
Finally, there’s real estate. Many commercial properties are selling for far less than their pre-pandemic valuations. As for residential real estate, many people sadly recall how property values plummeted a few decades ago. So yes, you can lose in real estate as well.
Whatever the investment, there’s a risk. And whatever the risk, there’s a financial advisor that can identify it. A good approach is to diversify among several asset classes. As noted above, stocks give you a reasonable shot at maintaining your purchasing power. And never put all your eggs in one basket.
Don’t be surprised if, at some point, the investment world inhales and values decrease. Prepare for it, but don’t panic. Fluctuations are the norm. Seasoned investors view pullbacks as opportunities. If you have any doubts or concerns about your portfolio, I suggest you review it with your advisor.
