The “We are in the worst economic climate since the Great Depression” wackadoos sure put up a good fight.  But now more folks are finally seeing through their flawed logic. 

From a recent Newsweek article: 

The specter of depression stalks America.  You hear the word repeatedly.  Are we in a depression?  If not, are we headed for one?  The answer to the first question is no; the answer to the second is “almost certainly not.”  The use of “depression” to describe the economy is a case of rhetorical overkill that speaks volumes about today’s widespread pessimism and anxiety.  A short history lesson shows why.

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When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist.  Last Friday, the S&P 500 closed at 1239.  Contrast that to where the index was trading at 10 years ago – 1164 – and you end up with a gain of about 6.4%. 

So why am I still so enthusiastic about my “stocks for the long run” philosophy? 

Take a look at history. 

The last time we went through a similar market environment was from about 1969 to 1982.  Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory. 

But people who maintained their discipline and continued acquiring equity positions were rewarded for it. 

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it.  Or there were others who prospered simply from dumb luck for being in the right place at the right time. 

You see, tangible assets – real wealth – does not vanish in a market decline.  Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.   

And that’s the way it has been throughout history. 

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Everyone wants to be financially independent.

Everyone wants a safe investment portfolio.

But not everyone has real world financial safety.  Do you?

If I give you the choice between conventional financial safety and real world financial safety, which would you pick?  Or didn’t you know there was a difference?

Let me explain.

As a rookie stockbroker in the 1970s, I was instructed by my superiors to follow the conventional model of financial safety.  They said to me, “Roland, if you have a client that is 65 years old, you need to put 35 percent of their money in stocks and the remaining 65 percent in bonds and other dollar-based investments that are guaranteed and insured.”

For the mainstream this was (and today still is) considered the safest way to manage money, especially for retirees.

Here’s the conundrum – in the real world “safety” has a totally different meaning.  In the real world, financial safety is NOT the preservation of my principal.  It’s the preservation of my buying power.   

If you are old enough, you will remember the price of a new Mustang convertible when it debuted in the 1960s.  About $2,395.  In that day gold was trading at around $35 an ounce so it took about 69 ounces of gold to buy the Mustang. 

In the late 1960s, $5,000 would have bought you two new Mustangs.  If you had instead put your $5,000 in government bonds for “safe keeping” and taken the out in today, you would no longer be able to buy two brand new cars since the interest on your bonds has not kept pace with inflation and taxes. 

However, if you had invested your $5,000 in a tangible asset such as gold, your buying power would have been maintained since 69 ounces of gold will today still buy you a new car.  (Note: Gold is a terrible investment and I only recommend it as a hedge against inflation.) 

And now for a quick history lesson.

For the last 100 years or so, the financial industry has considered dollar-based investments such as bonds, bank CDs, and fixed annuities to be among the safest options available.  There was a time when this actually was true.

Over a centruy ago when the federal government issued U.S. Savings Bonds, those bonds were backed by gold and investors were certain their buying power would be preserved. 

As long as the dollar was on the gold standard, it was.

Then came 1971 and Richard Nixon removed the final link between gold and the dollar while the Fed continued creating dollars out of thin air to pay for the Vietnam War.

But what remained was the common belief that dollar-based investments were still sound, long-term assets.

Important Point For Investors: History teaches that when a currency is no longer backed by a tangible asset and its value is at the mercy of government decisions, all investments that are claims on that currency must be viewed as speculations.

Most people today have limited background in monetary and economic history.  They fail to understand that those dollar-based investments they own carry a risk level that would have scared the bejeezus out of people living when the dollar was on the gold standard.

Perhaps a nice way to summarize this article is: Real world financial safety is so simple that most investors fail to apply this little rule of wealth preservation to their financial decisions.  Then one day they wake to realize the buying power of their portfolio has been confiscated and they have no clue why. 

Sad.

My hope is this will never be your personal fate.  So long as you stay informed, I like your odds.

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