Are You Guaranteed to Lose 3.5% Every Year?

Here’s a stat that probably won’t shock you (or, who knows, maybe it will) via BlackRock:

“According to Gallup’s annual Economy and Finance survey, only 52% of Americans are either personally or along with a spouse invested in the stock market as of April 2013. This is the lowest number since Gallup began the survey in 1998 and 13% lower than the pre-recession high in 2007. It is possible that this has to do with the impacts of emotional investing or peoples’ decreasing appetites for risk since the recession.”

If you’re reading this website you should definitely understand this basic point.  We allocate our cash into various assets primarily to achieve protection against the loss of purchasing power.  That is, if you leave 100% of your savings in cash you are guaranteed to lose about 3.5% on average just from the loss of purchasing power (that’s the average CPI since 1925).  The best way to protect against this is to get in the asset diversification game and start owning assets that will help you protect your money against this loss of purchasing power.  It sounds like such an obvious and simple premise, but millions of people fail to understand it.

I wrote this research note about the “Investment” myth in order to help conceptualize some of these key points.  Contrary to popular mythology, a portfolio doesn’t really have to beat the S&P 500.  It also doesn’t have to compete with hedge funds or Warren Buffett or anyone really.  In fact, it doesn’t have to do half of the things that Wall Street says it needs to do.  But it really does need to keep pace with purchasing power or you’re falling behind just by doing nothing or misunderstand this most basic point.   And it’s easier than you think.  I spend most of my time these days teaching people how to build these types of portfolios and training them to feel comfortable doing it on their own.  But you have to want to do it or you’re destined to a world of guaranteed 3.5% losses on your savings.