The Value of a Dollar
For every step backwards it takes two steps to go forward. Traditional thinking believes that in order to grow your money or create wealth that time is one of the main components in the equation (premise). If you are planning (hoping) to retire in twenty years then the equation for achieving this goal looks something like this. Amount of money saved each month times a rate of return compounded over twenty years. This goal (premise) can be achieved if all the factors in the equation remain consistent and go as planned. But if you consider the "risk of return" in this equation (premise) then you must take into consideration that the marketplace, on a yearly basis, has positive returns about 66% of the time (Dow)*. Taking that into consideration the equation requires 20 years of positive rates of return, but on average, six of those 20 years will have negative outcomes. If this occurs then the results after 20 years will be considerably short of the predicted goals. To achieve the desired goal, six more years of investing may be needed to make up for the six losing years and another six years may be needed after that to compound the results to the desired goal. Unfortunately, if the 20 year goal was to be achieved by the time you reached the age of 65, then you have no way of making up the TIME that has been lost due to down market years. If you lose 20% of your money one year you need a 25% rate of return the following year just to break even. Yes, you got your money back but you lost two years of time. The real problem is that you lost two years that were an important factor in compounding your money. Once lost, time is very difficult to make up.
In traditional thinking the premise is very important, but it is not a science. Traditional assumption of accumulation of money over a period of time seldom achieves their predicted goals. You will find it difficult to get the right solution when you're starting out with the wrong premise. Einstein once said, you can't solve a problem using the same thought process that got you into the problem in the first place. Much of today's traditional financial thinking was designed by those who create the situations, control the outcomes and profit from doing that. To them your desired goals may be secondary.
Simply believing that the accumulating money to secure your future is the only challenge you face may leave you defenseless in the future. Much of the money you accumulate will be surrounded by unintended consequences. Taxes, inflation and depreciation of your future dollars and its buying power will impact your financial future.
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Ira Starr MRFC®, LUTCF®
Master Registered Financial Consultant