Dec 1, 2017 2:24 PM
The Great Recession of 2008 has left its mark on many investors. Their confidence was shaken with the series of bank, broker, real estate, and insurance company failures, along with lower stock and real estate prices. Not since the Great Depression have we seen such financial damage. For the generation that lived through the Great Depression, many never fully regained their confidence and for today’s investors this has also been true. Only now, after 10 years, are people feeling a bit more confident in the markets. After the Great Depression people saved their money, many literally buried it in coffee cans in the backyard. President Roosevelt insured the banks, but people were still reluctant to trust them. The effect was a negative return on savers capital and today’s investors have reacted in much the same way.
Inflation is a killer especially for retirees living on a fixed income, their buying power is ever decreasing. If the Fed is successful in reaching their 2% inflation target, the historical average is just over 3%, the new crop of baby boomers will face a life of living on fixed income very challenging.
We have a very nice elderly client who was a Depression Era saver. She only bought insured C.D’s, and short-term U.S. Treasury notes. She had saved $500,000 after losing her husband and raising three children. She lived very modestly, no brand new cars, or fancy vacations. We ran her numbers, the amounts saved and earned, for 30 years of interest and savings versus inflation over that same period of time. Her $500,000 was worth -1% less after inflation. She was shocked, to say the least. But what we did not tell her was that the returns were not adjusted for taxes. After taxes and inflation she had negative real adjusted return by keeping her money in savings and CD’s. One cannot save themselves to riches, one must invest!