Passive Wealth Accumulation
I am going to introduce a controversial topic… investing. This is an important topic considering this is a finance blog. Why is it controversial you may ask? It is controversial because many people do not partake in it, therefore by logical reasoning, it is controversial. The original purpose of my starting this blog was to encourage people to invest. In this article, I am going to dive into the fundamental reasons you are losing out by not investing. The easiest way for me to do this would be to link to sources from reputable individuals like authors, hedge fund founders, billionaires, etc. However, that would be too easy and you could do that on your own. I will base my thesis on three fundamental components; historical returns, inflation opportunity costs, and asset appreciation. So let’s start this deep dive with the S&P 500. If you don’t know what the S&P 500 is it is simply a basket of the 500 largest companies in the US. Let’s talk about some historical events that caused massive sell-offs in an index. I will use approximations of the S&P500 price for simplicity.
-Market Crash of 1929
Peak: $30
Trough: $5
Percent: -83%
-Market Crash of 1987
Peak: $330
Trough: $220
Percent: -33%
-Dotcom Bubble Crash of 2000
Peak: $1500
Trough: $800
Percent: -47%
-Financial Crisis of 2008
Peak: $1560
Trough: $670
Percent: -57%
-COVID Crash of 2020
Peak: $3350
Trough: $2310
Percent: -31%
-July 9, 2021 - $4360
Relative return from 2020 Trough - 89%
Relative return from 2008 Trough - 551%
Relative return from 2000 Trough - 445%
Relative return from 1987 Trough - 1882%
Relative return from 1929 Trough - 87,100%
Let’s visualize this if your great-grandparents would have invested $100 at the trough of the market crash in the 1920s. That would have bought you 20 shares, which in today’s market is equivalent to $87,100. Alternatively, if they left those same $100 in a deposit box, well you would have $100. Quite the antonym if I do say so myself.
The idea of inflation is vague to some people but the reality is that the money in your pocket today will have more practical utility than any time in the future. I can almost guarantee it. The FED (US Central bank) has two mandates, stable prices, and maximum employment. So, as we recover from the COVID induces economic slowdown, the FED used all of its tools to stimulate the economy, including the federal funds rate to 0% (FED loan rate) and quantitative easing (increase the money supply). Essentially, these two tools, while useful, in the short term create drastic inflation as seen in recent Consumer Price Index (CPI) data. Some year-over-year prints have seen as high as 4.2%, almost double the (2%) baseline level. All in all, inflation will persist and inflation is the enemy of savings as it deteriorates its buying power.
My third and final point toward my trifecta-investment thesis is that assets appreciate faster than wages growth. Personally, this is the biggest reason I invest. The proof is in the pudding. Think about the richest people on earth, how did they accumulate their wealth? It certainly wasn’t from working a 9-5. They own their respective companies and as the asset grows so does their wealth. In my personal belief, this is the reason for the tremendous wealth inequality we are currently experiencing. While a handful has billions in assets, others live paycheck to paycheck. To put this in perspective, the S&P rises on average 6-8% a year, while wages often increase less than 2% in the same time frame. That’s a 3-4x better return on something completely passive. In essence, work smarter not harder.
My best investment advice is and will always be to buy the S&P500. For many years I refrained from using buying the S&P500 because it was always making record new highs. I thought that I will buy it after the next big sell-off, yet every time that sell-off comes I think there will be another leg down essentially a self-defeating prophecy. Interestingly, if you have ever bought the S&P and held you have made money because as of July 9th, 2021 close it made another all-time high. Will it persist? If history is any indication of the future, it will. If nothing else, by investing in the S&P500 you are betting on the prosperity US economy. That is a bet I am willing to make.
-Market Crash of 1929
Peak: $30
Trough: $5
Percent: -83%
-Market Crash of 1987
Peak: $330
Trough: $220
Percent: -33%
-Dotcom Bubble Crash of 2000
Peak: $1500
Trough: $800
Percent: -47%
-Financial Crisis of 2008
Peak: $1560
Trough: $670
Percent: -57%
-COVID Crash of 2020
Peak: $3350
Trough: $2310
Percent: -31%
-July 9, 2021 - $4360
Relative return from 2020 Trough - 89%
Relative return from 2008 Trough - 551%
Relative return from 2000 Trough - 445%
Relative return from 1987 Trough - 1882%
Relative return from 1929 Trough - 87,100%
Let’s visualize this if your great-grandparents would have invested $100 at the trough of the market crash in the 1920s. That would have bought you 20 shares, which in today’s market is equivalent to $87,100. Alternatively, if they left those same $100 in a deposit box, well you would have $100. Quite the antonym if I do say so myself.
The idea of inflation is vague to some people but the reality is that the money in your pocket today will have more practical utility than any time in the future. I can almost guarantee it. The FED (US Central bank) has two mandates, stable prices, and maximum employment. So, as we recover from the COVID induces economic slowdown, the FED used all of its tools to stimulate the economy, including the federal funds rate to 0% (FED loan rate) and quantitative easing (increase the money supply). Essentially, these two tools, while useful, in the short term create drastic inflation as seen in recent Consumer Price Index (CPI) data. Some year-over-year prints have seen as high as 4.2%, almost double the (2%) baseline level. All in all, inflation will persist and inflation is the enemy of savings as it deteriorates its buying power.
My third and final point toward my trifecta-investment thesis is that assets appreciate faster than wages growth. Personally, this is the biggest reason I invest. The proof is in the pudding. Think about the richest people on earth, how did they accumulate their wealth? It certainly wasn’t from working a 9-5. They own their respective companies and as the asset grows so does their wealth. In my personal belief, this is the reason for the tremendous wealth inequality we are currently experiencing. While a handful has billions in assets, others live paycheck to paycheck. To put this in perspective, the S&P rises on average 6-8% a year, while wages often increase less than 2% in the same time frame. That’s a 3-4x better return on something completely passive. In essence, work smarter not harder.
My best investment advice is and will always be to buy the S&P500. For many years I refrained from using buying the S&P500 because it was always making record new highs. I thought that I will buy it after the next big sell-off, yet every time that sell-off comes I think there will be another leg down essentially a self-defeating prophecy. Interestingly, if you have ever bought the S&P and held you have made money because as of July 9th, 2021 close it made another all-time high. Will it persist? If history is any indication of the future, it will. If nothing else, by investing in the S&P500 you are betting on the prosperity US economy. That is a bet I am willing to make.
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