A true inflation hedge is
one that goes up in value
with higher inflation...like
a house, or gold, or collectibles.
But, the fact is, inflation
is the stock market’s number
one enemy. When inflation
goes up, interest rates
go up and two things happen.
For one thing, investors
say, "Golly, I can make
all that money on high interest
rate bonds so why should
I invest in stocks." So
they take their money out
of the stock market, and
stock prices go down. The
second thing that happens
is that the cost of doing
business goes up. So corporate
earnings go down, and stock
prices go down.
So why in the world would
anybody say that stocks
are a hedge against inflation?
It’s because they can make
money in stocks faster than
inflation will eat it up.
All they have to do is invest
in stocks which have earnings
growth rates higher than
the sum of inflation and
long-term interest rates.
When they do that, the price
of the stock will go up
faster than inflation. And
they will be whipping inflation
by staying ahead of it.
| MYTH
#5: YOUNG PEOPLE CAN
AFFORD TO TAKE HIGH
RISK |
Of
all the myths in the market,
this may be the cruelest
and the most foolish. Everyone
knows that the elderly are
not supposed to take risks.
They must be very conservative
because their earnings power
is limited. They can’t afford
to lose their money! Well,
who decided that young people
could afford to lose their
money?
If any group needed to watch
every penny, it’s the young.
They need money to start
a family, buy a house, buy
furniture, save for the
future and on and on. Furthermore,
young people usually are
at the low end of the earnings
scale. They have precious
little disposable income.
Young people have an invaluable
asset on their side, however.
Time. They don’t need |
|
to take risk. They can invest
in tried and true companies
that make money year in
and year out. At 10%/year
growth, their investments
will double every seven
years. By the time baby
is off to college, that
initial safe investment
has increased by a factor
of eight.
When you have time, you
can afford patience. Patience
pays off in the market. |
