The Value of $100

When clients invest with us, one of the first conversations we have covers their financial goals and their risk tolerance. During volatile markets we continue the conversation if worry happens to arise. I’ve always said “stay the course” and here’s why: 

Imagine this scenario. I was born in 1945.  Suppose I was gifted $100 (granted $100 was a big sum in those days). Today it would require $1,463 to equal the same purchasing power.

If my parents had a very conservative risk tolerance, they probably would have invested the $100 gift in safe and guaranteed investments yielding very little.  Using the United States 3-month Treasury Bills as a benchmark, the expected yield over 76 years would have been 3.84% annualized. 

If my parents were more aggressive, but still not wanting to take risk, they probably would have invested in bonds.  The bond yield would have been about 5.33% annualized. 

And if they were investors who really understood the time value of money, they would have bought stocks.  The average annual return was 11.36% over the 76-year period.

In essence, all of the returns seem good when viewed in the present. However, after compound interest works its magic, the reality is very few people have enough money to avoid risk. Avoiding risk has significant costs when long term consequences are considered.

But 76 years later the reality is very apparent. My parents should have invested in stocks as there would have been a great reward.

The safe Treasury bill investment is worth only $1,754.  The original $100 adjusted for inflation is $1,478.

The bond investment is worth $5,181.

BUT if my parents had invested the money, that $100 would have grown to $356,893!

Some of you may be skeptical but let’s suppose you were fully invested when the market peaked in 2008.  You chose not to sell.  You stayed the course while your friends may have boasted about how they got out of the stock market.

If you ignored all the negative news and remained fully invested, your return over the past 12 years has been about 14.8%. 

The pandemic has caused many to re-think their investment strategy, but if you remained fully invested in 2020, your return would have been 18%.

Yes, there will always be periods when cash and bonds beat returns in stocks, however that has yet to happen over the long run. We remain committed to buying stocks for the long run.  Fixed income holdings in balanced accounts continue to be invested in shorter term and higher quality securities.  Our primary objective in fixed income is to preserve principal with income being a secondary objective. Of course, fixed income will help us reduce portfolio volatility but the reality is it significantly reduces long term growth of principal.

Sincerely,

Thomas J. Curran

 Founder & CEO

Curran Investment Management® is Defining Quality®

Source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html