Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not about how much you have at the end; it’s how much you could have made.
In our ongoing series of physician archetypes, we’ve now rounded third and are finally headed home (Sarcastic Reader: Thank God! When is this bozo finally going to teach us how to make some money rather than waxing rhapsodically like a damn philosopher…I’ll show you my Critique of Pure Reason*, you pompous jerk!)…and into the last archetype, one any of us could fall into at any point (like, say, 2009…just to pick a random year as an example).
Dr. Scared
There’s conservative and then there’s scared…
The line isn’t that fine between the two, but the ones so scared of losses that they lose by not investing appropriately rationalize it is so.
3.22.
3.22.
3.22%.
That’s a good number to remember.
As you may recall (and shame on you if you don’t), 3.22% is the average annual rate of inflation over the past century (1913-2013). That’s the rate at which your money is being eaten away at. At this rate, products will cost twice as much in just over twenty years as they do today.
The simple way to think of inflation is thusly (using this word makes you seem smart…even if you’re not…especially if you’re not):
If something costs $100 on January 1 and the inflation rate is…say, 3.22% (Gee, what an odd number…Where did he get that from?)…then exactly one year later, that very same product will cost precisely $103.22.
So…it’s not only a matter of growing your money, but doing so at a rate that is not leveled by inflation since what you can buy and your cost of living will be quite different than as you start out in your career.
{RLE #8: A couple I knew from medical school—who will be the subject of many future posts and RLE’s (Hi guys!)—were absolutely terrified of any fluctuations in the stock market since any loss was destruction of money they earned the hard way. Therefore, their investing style became 100% bonds and cash. Investing in only bonds and nothing else for 25 years has left them a nice amount of over a million dollars. But without accounting for inflation, they just got all their gains largely wiped out. They had just over a 6% rate of return in the past quarter of century vs. 10.72% [or a compound annual growth rate of 9.15%—more on this in a later post] with the S&P 500. Ouch.}
Don’t get me wrong.
The million dollars is still there, but its purchasing power is greatly diminished. This is the entire reason you want to gain the highest SUSTAINABLE (this wasn’t in all caps by accident; sustainability is the key here, not chasing some crazy ass [sorry to lose you in the financial technical jargon] high rate that won’t last even six months) rate of return as possible.
It’s not happiness that money can’t buy; it’s time.
And once you spend 25 years underinvesting, you can’t get that time back.
Ever.
There’s absolutely nothing wrong with a cash and bond only investing style…for a few…but not most everyone…and you need to know all the upsides and downsides of doing so. (Much, much more on this in a later post.)
Like I said multiple times before (and asked you to never forget—come on people, get it together!)…
“It’s not about how much you have at the end; it’s how much you could have made.”
You’re investing in the US and likely broader global economy. It’s been a great bet for centuries. That won’t change any time soon.
So get out there and make sure your money is working at least as hard as you are, if not harder.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Talk to you soon.
*Critique of Pure Reason (1781) by Immanuel Kant is one of the foundational works of philosophy dealing with the limits of human knowledge and how/what we perceive and can truly learn. (*Whispers* Whoa, that’s not even a money thing. I’m going to be so smart reading this blog that I’ll read it forever and ever and recommend it to all my friends and all their friends…and…OK, this has gone from trivia to subliminal suggestion to outright begging…enough…my apologies.)