Dollars and Diagrams

The Real Risk: Losing Purchasing Power NOT Loss of Principal


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.

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