Simon Says #7

Simon Says #7 - Future Value of Money

Matt Simon

Hello friend, and welcome back to Simon Says.

If you’d like to read any past issues of Simon Says, you can find them all here.

Imagine this.

You can have $100 today or $100 in a year from now. Which would you choose?

This simple question demonstrates the concept of time value of money. In plain English, a dollar today is more valuable than a dollar tomorrow. This is self-evident but the reasons for it can be more complex.

Money today can be used for whatever you’d like. You can buy a squat rack for your basement, go see Mount Rushmore with your family, or you can do what I would consider the “smart thing” by investing the money and hopefully making a profit.

Money in the future is subject to all kinds of uncertainty. We’ve all become quite familiar with the word ‘inflation’ over the past couple years. Prices of everything from gas to housing to food have gone up everywhere and continue to increase above the Federal Reserve's goal of 2% inflation.

Places like Hungary in 1946, most recently Venezuela in 2017, or most famously Zimbabwe in 2007, have experienced extreme levels of inflation, also known as hyperinflation. Zimbabwe’s President at the time, Robert Mugabe, tried to fight basic economics by printing a One Hundred Trillion Dollar Bill. It’s hard to even fathom how large that number is, yet it was worthless in the fact that it couldn’t be exchanged for anything of real value.

$100,000,000,000,000 … 14 zeros

The good news is that there are things we can do to position ourselves for success regardless of the economic situation.

Invest in Businesses.

One way this is done is through the stock market and the use of ETFs or mutual funds, which are simply just baskets of individual stocks and bonds. Take a look at the chart below showing the value of a $100 investment into the S&P 500. $100 held under the mattress since 1972 would still only be worth $100 today and it’s purchasing power is only fraction of what it was 50 years ago. In comparison, a $100 investment into the 500 leading U.S. publicly traded companies would be worth much more today than it was in 1972.

OfficialData.org. S&P 500 Data. Retrieved from https://www.officialdata.org/us/stocks/s-p-500/1972?amount=100

This hypothetical example is for illustrative purposes only. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.

Invest in Physical Assets

Investing in physical property can be a great option for some people. Although ownership comes with responsibilities like taxes and maintenance costs, it can also provide income through renting out your property to families or businesses.

Another option to get exposure to real estate is through Real Estate Investment Trusts (REITs), which are real-estate focused investment vehicles that can be purchased through the stock market, just like ETFs and individual stocks.

Invest in Commodities such as gold and silver.

Gold and silver have held value over time and historically have acted as a reliable shelter during periods of economic uncertainty, which is why they can be a way to help diversify your investment portfolio. One downside is that you can’t rent out your gold and silver to create cash flow. They rely solely on price appreciation, which can be unpredictable and subject to the ups and downs of the market. The biggest issue with owning physical gold and silver is that it requires storage and security considerations. Where would you put $1M of gold coins if you found buried treasure? Instead of purchasing physical gold and silver, consider investing in ETFs or mutual funds that hold these assets, which helps eliminate those types of concerns.

If you have any questions about your own investments or financial plan, book a quick 15–30 minute call with me using the link below.

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