June 2018 - Investing - What's the Point?
- Delaying gratification and how it can affect your financial decisions.
It’s a question everyone should ask themselves. Whenever we contemplate the choice, we think of generally two things. Should I spend the money today or should I delay the gratification to make life easier in the future? It’s that simple.
As we contemplate that decision we need to first focus on the now. Is it essential? Is it a need? Will it make my life easier today? Is the spending today simply for enjoyment?
If I don’t spend the money today, I better get something great in the future. I wonder if the loss of immediate enjoyment is really worth it. In order to determine that, you first must understand returns on investment, the power of inflation and your financial planning goals.
The Magic of Compounding
The S&P 500 average annualized total returns have been almost 10% over the past 90 years. In 2017, stock investors earned 20%. We like to think that stocks over the next 10-20 years might average 8-9%. Remember, every decade tells a different story.
Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't….pays it." Indeed, compounding your investment returns year by year is the great equalizer. It doesn't care who you are or where you come from. Compounding returns year after year builds momentum and wealth. It delivers psychological peace of mind and freedom that allows us to sleep well.
The Destructive Power of Inflation
A big wealth destroyer can be inflation, especially for those who are retired on a fixed income. The rising price of goods and services when holding cash, or something in an asset not linked to inflation, is paralyzing.
In the United States, we have seen inflation rise over 10% in the early 80’s. Since the end of the Cold War in 1989, it ushered in an era of globalization as companies throughout the world saw markets for their products expand. Over the last decade, inflation has been held down closer to 2%.
Competition overseas with the large multi-national corporations has certainly kept prices under control. The more choices consumers have product-wise, keeps companies from raising prices too high. Globalization and free trade does allow for lower inflation rates which is good.
President Trump's potential trade wars may be problematic. These protective policies could cause a significant uptick in inflation. In other words, the prices of everything we buy may possibly go up.
Some say Trump is simply negotiating and posturing. Let's hope this all works out for our best.
The Ultimate Decision
The ultimate decision-making point in which you grab for your wallet or not should depend on your financial planning goals.
I have come to believe delayed gratification is indeed one of the keys to financial success. Here are my favorite tips:
- Write down a list, or even pictures, of a goal you might have. Post it in a prominent place. It could be a picture of Hawaii or a new car. A cruise. A picture of something from your "bucket list". Tell your family and friends. Have them help you be accountable for how you are doing saving for that goal.
- Ask yourself before every purchase, “Is this a want or a need?” Will this purchase hinder my ultimate goal? Push off the wants.
- Talk to someone two decades older than you and ask them what they would have done differently with their money at your age. They might just talk about focusing on saving earlier in life. Not a bad idea to start contributing into your 401(k)s, or setting up a 529 college savings account for your children or grandchildren now.
The battle in our wallets is real. Here's to spending your summer wisely.
Thank you so much for your trust and confidence. If there is anything we can do, please let us know.