Scene- the year 2000, I had been investing since about 1994. I consulted with a financial advisor at my local credit union and started putting away $25.00 per month into an investment account. My financial advisor at the time invested me in a mutual fund with 100% tech holdings, and that is where all of my money stayed….for years. I funded this account with the purpose of using the funds to pay for my education or buy my first house. I kind of scoffed at my free spending friends, because I knew better than them, I had an investment account. So over a number of years I watched my meager monthly contributions grow, then double, then triple, then in confusion as I watched the balance slowly erode away. WTH markets go down? First I watched as all my gains deteriorated dollar per dollar, then I saw it accelerate, the Tech Bubble was upon us. There was a crazy race to have a tech company, to be cool, have a ping pong table in your office, wear chucks to work and show America how to re-write corporate America. Like most bubbles this one popped in the most glorious fashion, and I was swept away in the tide of losses, and watched as some tech companies’ stock became more worthless than toilet paper (at least toilet paper serves a purpose, you get where I’m going) and with no contact from my advisor I was in free fall. Finally, I pulled the money out and used it to pay for some of my last two years of college. You see people the amount I pulled out was less than the amount I put in, this is known as loss of principle.
So why would you ask am I a financial advisor much less a CFP®, Wow you are so smart I am glad you asked. Because historically speaking had I kept that money in the market and just reallocated (meaning bought different stuff), I would have made back that money by now and more…in a big way. As a Millennial, hipster, young person, whipper snapper, whatever you fancy yourself, you have time on your side. There is time for you to take risks, recover, take them again, rinse, lather, repeat. Traditional banking products for the most part do not outpace inflation. What is inflation? It is simply the price of everything going up: gas, food, rent etc. Let’s do some basic math really quick; you have a savings account with $5,000.00 in it and it is paying you an annual percentage yield (APY) of 0.10% (pretty much current going rate.) This would mean annually you will earn $5.00 dollars for the year in interest from a typical bank. So, within 12 months you will have a balance of $5,005.00, assuming of course your account is totally free of fees and you have not withdrawn from the account etc.
Now reflect on this year, with gas prices fluctuating up and down do you think you have paid at least $5.00 dollars more filling up your tank? Ta Dah that is what inflation does to your money, I call it the silent killer. You don’t see the affect in your bank balance but you FEEL it, in your gas tank, in your dinning budget, in your travel budget and let’s not even talk about your cable bill.
This is why I continued to invest in the market, because I want my money to have a chance to keep up with inflation and not have my lifestyle eroded to a shadow of its former self.
In other blog posts I will be covering risk tolerance and what it means, but that day is not today. If you have questions about investing, or want to tell me how great I am, feel free to email me at email@example.com.