Dollars and Diagrams

The Real Risk: Losing Purchasing Power NOT Loss of Principal

Investments

It can feel good to avoid the loss of principal.  See that beautiful straight orange line? That is an investment-grade bond. Since 1982, it has had only 6 negative years and the worst year it was down only 7.12% (remember 2008?).

See that choppy blue line that has some big drops? That is the S&P 500 index. Since 1982, it has had only had 6 negative years as well, but 4 years had a 9% annual drop or more (2000, 2001, 2002, 2008).

Both funds started with $10,000 on the same day in 1982.

Both funds had 6 negative years.

The stock fund had 4 years worse than the worst year in the bond fund.

The difference: the stock fund has a current value of $708,957 more than the bond fund.

Let’s say that you want to take a 4% distribution from your portfolio, the stock fund would provide $28,358 more per year.

People do get confused about this. The greatest risk that we will face is not the loss of principal, but the loss of our purchasing power.

Owning the best companies in America & the world with a proven ability to innovate during challenging times gives us a chance to pursue financial independence.

IMPORTANT INFORMATION

Information in this material is for general information only and not intended as investment, tax, or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.

This is not a recommendation for VFINX or FBNDX.  This was to simply illustrate the long-term performance of the S&P 500 (an index that you cannot invest in directly).  FBNDX is an investment-grade bond fund that has been around since 1971 and feel is a good proxy for the investment-grade universe. Past performance is no indication of future results.

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