The Risks of not being in the Market

The Risks of not being in the Market

People talk about the risk of being in the market but the risk of not being in the market escapes them. What I'm talking about is the time value of money which simply means that inflation will decrease the purchasing power of your cash over time. In other words a dollar in the future will buy less than a dollar would today. Even in a low inflation environment the longer time is allowed to erode away the purchasing power of your cash the farther back you find yourself.  Time is the leverage that inflation uses to rob you of your money's purchasing power.

When you make an investment be it in a stock, a bond, a house, a bank account its commonplace to compare your rate of return to the current risk free rate which is generally thought to be the yield on the government's ten year bond. At this moment the U.S. ten year bond yields 2.33 % while Canada's ten year bond yields a rate of 1.52. Historically speaking these rates are very low. The supposedly 'safety-first' investor putting his money in a one year GIC will be getting paid peanuts in return and find the purchasing power of his cash eroding away over time. 

Buffet has often said he likes to invest in 'productive assets' which brings us back to our definition of return on invested capital (ROIC)..." It is the ability of a company to create value. Value is created when a company's  return on capital is greater than the cost of that capital. Over time the additional return on capital can be re-invested in the business to help accelerate it's growth as an ongoing concern"

With current yields so low it just makes sense to invest in the stock market's 'productive assets" and protect yourself against the ravages of inflation. How to go about investing in the stock market is what this blog is all about. I wish someone would have taught me this simple but important concept back when I was in public school, it could have changed my life.