Inflation is a prominent player in any evaluation of investing over time, because inflation is a time-dependent process just like compound returns and market gyrations.
In short, inflation is when the prices of goods and services rises over time, which means the “purchasing power” of your money is falling. A Big Mac may be priced at about $4.00 today. But if the cost of the Big Mac ingredients (beef, flour, lettuce, etc.) and the labor (hourly wages) to make the Big Mac go up by 3% a year (for example), the price of a Big Mac may be $4.15 next year. It’s the exact same Big Mac, but next year you might need an extra $0.15 to buy it. Your $4.00 can’t buy quite as much as it used to; it’s “purchasing power” has gone down.
I recently received my company’s annual 401K performance and expenses disclosure packet. This is super secret information that 401K providers don’t want you to know about, but they’re obligated by law to mail it out at least once a year. Mine came in a very innocuous looking white envelope. The packet inside presented “Investment Related Information” in tiny 10 and 8 point fonts. It seemed like it must be something unimportant like an advertisement or a standard legal disclaimer.
It was all so boring looking that I was tempted to immediately throw it in the trash. That’s probably their hope. Instead, I decided to get out my magnifying glass and investigate this bland little document. It seemed to contain:
The performance of each fund in the 401K plan as compared to its benchmark on 1, 5, and 10 year intervals, and since fund inception.
The fees charged by the 401K provider for any interactions with them, like requesting a hardship withdrawal.
The fees and expenses charged by each fund, even though you can’t interact with them.
This sounds like pretty interesting information after all. How surprising!
A couple of weeks ago I posted about how a heart attack paradoxically improved my life outlook and health. I sincerely titled it “I Hope You Have A Heart Attack“, with the assumption that I also hope you have an outcome just like mine. I promised I would post a follow-up that was more focused on how this event changed my financial plans.
Today I will compare my “pre”-heart attack plans to my “post”-heart attack plans related to several areas of personal finance. I’ll discuss how having a near-death experience impacted my rationale behind those plans. If you haven’t read “I Hope You Have A Heart Attack“, it might be worth your time to read that post first to understand how irritatingly optimistic my stay in the hospital made me. But reading last week’s post is not a prerequisite to understanding the rest of today’s post.
Just in case you think I’m a total jerk, I’ll start this post by saying that I don’t literally wish for you to keel over this instant with a coronary event. Why I would write such callous headline is best explained by telling a story that I’ve already told many friends and family.
A Normal Day
A few months ago, shortly after the start of my fifty-second year, I was working in my garden on a pleasant still day. Spring was yielding to summer. It was chilly kneeling in the shade as the ground released the last of winter’s freeze. Standing up and moving to retrieve a nearby tool in the sun was like dipping headfirst into a warm pool. Gardening is not my favorite activity, but I can usually find some enjoyment, or at least a sense of accomplishment, in it. That day, as I worked to revive our sprinkler system from winter hibernation, my spirit was lifted each time I focused on the smell of the soil or the surrounding bird chorus.
Winter is hard on plastic and metal buried in the ground. Pipes break, sprinkler heads seize or inexplicably disappear, connections collapse, and so on. I had just repaired a pipe in our soon-again herb garden, where volunteer oregano had already emerged. I had moved on to replacing a sprinkler head in the aspen grove just uphill, when I noticed a persistent pressure in my upper stomach. Perhaps you’ve never had this particular feeling, but I’ve had it many times before, and it can always be relieved by a few healthy belches. In the past, the feeling has sometimes shaded beyond pressure and into pain, until the air can be expelled. But this time my stomach remained locked tight. The pressure slowly but resolutely crossed the threshold into pain. I asked Marie to bring me a glass of soda water. I thought perhaps the carbonation would force the issue. We don’t have a bring-me-a-beer type of marriage, but Marie likes to facilitate any free labor in the garden and brought me the water. Rather than the crescendo I’d hoped for, gulping the soda water caused a few meager burps. The pressure was still there.
Whether you can time the market or not really has mostly to do with how you define your terms. This is why you will see arguments on both sides of the issue in the personal finance world. People too often define “timing the market” in such a way that it supports their arguments, and then fail to recognize the tilted playing field they’ve created.
Given that a mindful investing approach requires an empirical and logical reason for doing anything, we need to cover two concepts about timing the market, which can be distinguished by their relative time frames:
Short-term timing – This means buying and selling stocks in time spans roughly less than a year (daily, weekly, monthly).
Long-term timing – This means investing decisions based on stock market movements that occur over many years, such as the time between when you start to invest and when you withdraw money in retirement.