Inflation Through The Eyes Of Wendell Holland

by | May 25, 2018

SEE FULL VIDEO TRANSCRIPT BELOW:

– What’s up everybody, Justin Harvey here. Happy Memorial Day weekend.

Want to quickly share a little bit about inflation, and the importance of investing for the future, and in order to do so, I want to discuss everyone’s favorite TV show, Survivor. So, anybody who watched the finale this week of season 36 knows that Wendell won the grand prize of a million dollars. Now, I think this is a really interesting number because it’s a nice round value that we can track over time for the 36 seasons that Survivor has happened.

Anybody who’s been watching since the beginning maybe remembers season one, Richard Hatch won in August of 2000, also won a million dollars. Notice this value has stayed the same. Do you think that economic conditions have stayed the same? Do you think that inflation has stayed the same? Do you think that this million dollars, between now and August of 2000, buys the same amount of goods? It actually doesn’t. This isn’t a surprise to you, probably. So, when Richard won a million dollars in 2000, in order for Wendell to get paid an equivalent amount in purchasing power, to buy the same amount of stuff, Wendell should’ve won 1.449 million dollars this past Wednesday. However, we know he won a million. So that’s a great deal for CBS, because obviously their winnings are getting less and less over time. And this is because of the affects of inflation.

Inflation since the year 2000 has averaged 2.18%. Now, this is actually well below historical norms in America, which is somewhere in the low threes right now. So, below average inflation for a period of 18 years, and what we’ve seen is the purchasing power of this million dollars, Wendell should’ve received almost 50% more in order to account for the loss of purchasing power with an inflation rate as small as two percent a year. That doesn’t sound like a big number. But it compounds over time, and that’s why it can be really problematic. So. If we’re looking at purchasing power equivalent, when Richard won a million dollars in 2000, how much can Wendell buy with that same million? The answer is, it’s 682,000 dollars. If they got paid at the same time, they both won in the same season or something like that, they both get an equivalent amount of dollars, Richard’s getting a million, Wendell’s getting 682k. That’s the differential. That’s the effect of inflation over time. It’s really powerful in the wrong direction for investors. And this is why it’s so important to be invested for the long term in assets that are going to grow over time.

So, this is the last chart I want to share with you. This is the erosion of purchasing power and how much cheaper this show is getting for CBS over time. So, Richard, you know, in the year 2000, his purchasing power equivalent is 1.449 million, where Wendell’s a million in today’s dollars, it’s almost a 50% differential. So, the reason I’m showing you this chart is it’s not only winners of Survivor who can be victims of inflation. And, you know, this is a really, it seems like a low, kind of innocuous number, but it’s really deceptive because over time it compounds, and the purchasing power that you have becomes less and less until you turn around 18 years later, and your money is cut in half, almost. So, my encouragement to my friends out there who are thinking about investing for the long term and are maybe scared about the markets or current equity evaluations or whatever. You need to, over the long term, for investments that are a decade, two decades out, you need to be invested in securities that are gonna grow, that are gonna keep pace with or outpace inflation in order to not experience this type of gap in your ability to fund your future living expenses.

Because a million dollars right now, fast forward another ten years, another 20 years, it might be worth 600k, it might be worth 400k, we don’t know what inflation’s gonna do. And if you stuff it in your mattress, if you keep it in a checking account, keep it in CDs, you’re going to be eroding the value of purchasing power over time, you can’t buy as much, and you’re going to have a hard time meeting your expenses as you move toward financial independence and potentially retirement. So, that’s all I’ve got for you today, hope everybody has a great weekend, happy Memorial Day, and I’ll talk to you next week.

 

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Herein contains my one-take thoughts on financial concepts, behavioral investing, money management strategies, financial media, and letting you “behind the curtain” on my efforts to help move my physician clients toward financial independence.  Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Website Disclaimer page for a full disclaimer.

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