In a previous blog, we discussed how the concept of purchasing power can be a good definition of long term risk. While there are a multitude of approaches to long term risk (and ultimately, it’s an individual determination depending on one’s personal circumstances), there are useful definitions of long term safety as well. 

Industry jargon is a fixture in finance and wealth management. Despite what advisors may believe, many clients are not equipped with the education necessary to understand much of the industry jargon. For instance –“equities” versus “fixed income” investments.  Equities are the concept that you purchase a piece of, or a share in, a business making you a part owner of the business – an “owner”. Fixed income is where you loan money to a business or government – becoming a “loaner” to that government or business. There are benefits to each approach depending on your risk profile and short and long term needs. Below are some of the attributes of being an owner versus a loaner. It is our job to find the right balance for each of our clients long-term and short-term needs.

Now that we have defined equities and fixed income, the question is: how does this relate to safety? If long term safety is the growth or accretion of purchasing power, then we believe that investors should be owners rather than loaners. That means owning businesses (usually in the stock market) rather than lending. This notion of safety (being an owner rather than a loaner) is contrary to popular belief. This is because people tend to think only in the short term where the volatility (ups and downs in business valuations) may be considered risky.

Please see the 2 charts* that are embedded below.  

The first is a long-term chart of the S&P” 500 (in our opinion, the best barometer for the US stock market and capitalism). As you can see, there are periods of volatility that create temporary loses - see grey shaded areas. However, as you can also see, over long periods of time, capitalism continues and being an owner of businesses benefits the long term, and patient investor.

The second shows the rolling annual 30 year returns from the corresponding start dates. As you can see, the worst 30 year return — using rolling monthly performance — occurred at the height of the market just before the Great Depression and stocks still returned almost 8% per year over the ensuing three decade.

We encourage investors who have a long time horizons to be perpetual owners rather loaners as a way to grow their purchasing power. Being an owner allows you to compound at a higher rate for long periods of time. Remember, the 60 year old investor has a 35 year time horizon, and the 35 year old investor should be planning for a 35 year + time horizon.

For further reading, click here to Own Your Future or click here to contact any member of of our team.

* This first chart is from http://www.multpl.com/s-p-500-historical-prices which is a great site for long term charts. The second chart is from http://awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/ and this is a great blog.