Saving & Investing
Patience and perspective.
What is investing? Investing is different from saving. Investing offers the opportunity to earn higher returns in exchange for taking reasonable risks over a longer time period. Investing is often described as the process of laying out money now in the expectation of receiving more money in the future.
At the Gleason Group, we define investing as forgoing consumption now in order to have the ability to consume more at a later date. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. While a nonfluctuating asset can be laden with risk. Investment possibilities are both many and varied. We break them up into three major categories below: currency-denominated investments, hard assets and productive assets.
The first category of investments include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” While true in the short run, over the long run they are among the most dangerous of assets. Their beta may be zero, but their long term risk is huge.
Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal. We believe, like Buffett, this ugly result, moreover, will forever recur. Even in the U.S., the dollar has fallen a staggering 90%+ in value since 1965, It takes about $8 today to buy what $1 did at that time.
The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else will pay more for them in the future. These require an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future.
The major asset in this category is gold. Gold has two significant shortcomings, being neither of much use nor procreative. If you own one ounce of gold for an eternity, you will still own one ounce at its end. It produces nothing.
The third category is productive assets which includes businesses, farms, and income producing real estate. We prefer this group and history’s on our side. Stocks (i.e. businesses) beat bonds in every category that matters – 2x the return before inflation, 3x the return after inflation (while bonds barely beat inflation), and taxes make the beating look even worse. Simply, bonds don’t offer any wiggle room when it comes to what really matters – making sure your dollars can buy the same stuff in the next decade(s) as you buy today.
Once you understand the real risks, stocks don’t seem so risky. But it’s not all bad news for bonds as they have one redeeming quality – relieving the pain and stress from volatility.
Long term investing is just as much a problem of maintaining purchasing power as it is the protection of principal. The cost of living has gone up in just about every year of our lives. The Consumer Price Index has been compounding at around three percent for the last century. Were it to continue during three decades of retirement, you could expect to see your living costs go up very nearly two and a half times.
A purely fixed-income investment strategy—focusing on preventing our principal from fluctuating—may leave you seriously exposed to the long-term erosion of your purchasing power. Put simply, a fixed-income strategy may not sustain you through a long life of rising living costs.
risk vs. volatility
Most people misunderstand investment risk. At the Gleason Group, we do not think of investment risk as short-term volatility, but rather a permanent loss and outliving your money.
Volatility is a temporary concept that passes with time. Most people see it as an excuse to act. Those actions lead to real risks, self-imposed risks, like being forced to take a pay cut in retirement because you made a temporary loss into a permanent one when you sold after the market fell, you changed investments out of fear, and your money couldn’t keep up with inflation.
Our role is that of advisor, planner and accountability partner. We base our investment recommendations on your life goals, not the market. As a fiduciary, we provide specific investment advice only after the formation of a plan and thorough understanding of your current financial situation through a process we call Financial Life Planning.
At the end of the day, the biggest factor in real life investing success is your behavior as an investor. This is a recurring theme repeated by all great investors – 90% of investing involves managing behavior, not your money. We act as your behavioral coach and emotional circuit breaker during these critical moments helping you focus on what matters and stay on track.
Faith in the Future
At the Gleason Group, we believe faith in the future is a huge determinant to real life investing success. One thing we can take away from history is the U.S. is nothing if not resilient. The US economy has seen it all and came back from the brink every time. It’s seen wars, crises, recessions, depressions, stagflation, and burst bubbles.
And if you believe the news, there’s always another crisis right around the corner. The relentless end of the world claims is proved wrong every time. The US economy is like no other. The capitalist machine is constantly self-correcting, creating, innovating, and driving forward stronger than ever and the market follows. Each generation is better off than the last.
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- Warren Buffett | Buy America, I Am
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