A Lesson of History
A Lesson of History – Don’t Fall Victim to A Classic Blunder!
As the year marches on, I’m up to Book Number 24. It happens to be Will Durant’s The Reformation: The Story of Civilization Part VI.
The book, originally published in 1957, attempts to distill global events between 1300 and 1564 in a comprehensive yet manageable discourse – an ambitious undertaking, to say the least!
Why spend the time to read a book from more than 60 years ago distilling the events and implications from up to 700 years ago? Being a student of history is helpful in putting current events in context. As Ecclesiastes tells us, there’s nothing new under the sun!
If history books or scripture aren’t your “thing,” perhaps 1980s pop culture movies are your preferred medium:
“You fell victim to one of the classic blunders! The most famous of which is, ‘never get involved in a land war in Asia,’ but only slightly less well-known is this: ‘Never go in against a Sicilian when death is on the line!’”
Ahh, The Princess Bride! Such a classic! I have no idea what it really has to do with my overall theme, BUT we do want to avoid blunders!
Many of our clients lived through the stagflation years of the 1970s and remember home mortgages at or above 15% in the early 1980s. While you may have lived through it, there’s a good chance you had more human capital and less financial capital at that time. As inflation went up, wages tended to increase as well. Today, some 40 to 50 years later, that situation has reversed: more financial capital and less human capital. If by chance we find ourselves on the verge of another decade of higher-than-usual inflation, the life lessons learned years ago may not apply today. Rather than “lived experience”, sampling the historical record can provide many “lived experiences”, or a “meta-analysis” if you will!
Returning to Mr. Durant’s book… In a passage on 1500s Russia, he described the turbulent times and legally mandated serfdom that largely began under Ivan the Terrible. Here’s a condensed version of the passage:
So turbulent a reign hardly favored economic progress or cultural pursuits. Commerce was favored in peace and wounded in war… Taxation was predatory, inflation was precipitous. The ruble in 1500 was worth ninety-four, in 1600 twenty-four, times the ruble of 1910; we need not follow the decline further, except to note, as one of the lessons of history, that money is the last thing that a man should save.
As Ecclesiastes reminds us, there’s nothing new under the sun.
Today’s global events can be unsettling. Interest rates on cash-like assets are currently around 5%; levels that I remember seeing on money market funds for a brief time around 2006 and 2007. At the time, Melinda and I were feverishly saving for a down payment on a house. Similar to what I hear today for many of your kids and grandkids, we couldn’t seem to save fast enough, and even with 5% interest rates, home prices were increasing so quickly that we worried if we would ever have enough. Little did we know the housing market (and global financial markets) were in for a significant change.
All of that is backstory. Today, almost two decades later, we are (finally) starting to see savers receive some nominal yields on their cash holdings. It feels good to know that our hard-earned cash can gain some interest. But is it gaining purchasing power? If we look at data from the last century in US markets, the answer is likely no, it’s not gaining purchasing power. In the following “heat maps”, red shows periods where assets lose purchasing power over time, while green shows maintaining or gaining purchasing power. The heat map on the left shows cash-like assets, while the one on the right shows the S&P 500 Index. It’s possible to lose purchasing power over modest lengths of time in equities, but it is much, much more likely to have that outcome by holding assets in cash-like assets.
We can have (polite) debates about whether taxation is reaching predatory levels. And while inflation has been elevated lately, I personally wouldn’t say it is “precipitous” (at least not yet!).
And yet Mr. Durant’s conclusion of one of the lessons of history is still one we should ponder and apply:
“…money is the last thing that a man should save.”
We need an emergency fund for the “what ifs” in life. It is a form of “insurance” whose “premiums” are the lost growth on that money. If we hold “excess cash” the cost of that insurance grows. It is a choice. I hope it is one that we are making intentionally as opposed to being lured into it by shiny “high yield” interest rates!
Maybe it is only semantics, but the words we use are important.
When we have excess, let’s INVEST in productive capacities around the globe. If we simply SAVE our excess, the likely outcome is diminished purchasing power over the coming years.
Sincerely,
Craig Smith, CFP®, CFA®, CKA®
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
