All about investment

By Richard Stooker

Managing your spending power to meet your needs is more important that "keeping up" with inflation.

Personal finance and investment writers constantly advise and admonish us to make sure that the value of our investments keep rising to match (if not exceed) inflation.

There's a sound reason for this. Inflation has been gradually eroding the value of our currency since the end of World War 2. From 1973 to 1982, the erosion was not even gradual. Everybody who went shopping during that period remembers how the prices of groceries and other goods seemed to go up every week. If the price didn't go up, what you got went down. It was the era of the incredible shrinking candy bars.

That is the period when annual Cost Of Living Allowances (COLAs) were instituted for recipients of Social Security and Veterans Administration benefits, government workers, and many private sector workers covered under union contracts. Of course, this institutionalized annual increases in expenses in the economy, which helps to maintain inflation in the economy.

So if I agree that inflation is a steady, insidious destroyer of the spending value of money, how does my advice differ from other financial writers?

I recognize that spending power should be managed across time.

And what I mean by that, is that it's usually better to defer spending when you don't need it, for times that you do . . . even if the spending power is reduced.

An example will make this clearer.

But first, remember that "saving money" is just another way of saying "postponing consumption." When you have $100 today you can choose to spend it -- or you can choose to save it so that you can use it to buy something later in your life, whether next week or when you're 105 years old.

In the 1970s, in reaction to the high inflation of that time, it became common wisdom to spend the money you had, as soon as you got it -- because it'd buy less in the future.

The most extreme case of this syndrome happened in Germany during the 1920s. Employers had to pay their employees during the middle of the day, then allow them to take their wheelbarrows full of their day's pay home during their lunch hour to buy bread for dinner. That's hyperinflation!

America in the 1970s was not that bad, but it was bad enough to really discourage savings, and to encourage financial writers to advise: "Your investments must keep up with inflation."

The problem is that planning for your retirement requires postponing consumption. You MUST save some of the money you earn during your younger years instead of spend it, so you will have it to spend during your elder years, when you're not bringing home a paycheck.

It's nice if you can find investments that maintain the spending power of that money -- but is it really a disaster if you don't?

Let's say you're now about 35 or 45 or 55 -- and working hard. All your bills are paid. You have a few thousand dollars extra, so you think about how much you'd like to take a Hawaiian cruise.

What if, instead of taking that cruise, you wisely decide to postpone consumption. You place that few thousand dollars into an investment that does NOT keep up with inflation.

Now it's many years later. You're too old and sick to work. You depend on Social Security and a pension, but they aren't enough for the lifestyle of your dreams.

One day you remember that few thousand dollars you put aside in lieu of taking a cruise around Hawaiian.

Inflation has reduced its spending money so that now it takes a few thousand dollars to buy a good meal. So you withdraw that money and buy yourself that meal . . .

THE FIRST MEAL YOU'VE EATEN IN FIVE DAYS!

So when is that few thousand dollars more important to you? When you have an affluent lifestyle and just want to take a Hawaiian cruise? Or when it buys a meal that keeps you from starving?

That's what I mean by managing spending power to meet your needs.

Of course, it's even better to invest that few thousand dollars in a way that will allow you to take as many Hawaiian cruises as you want, once you retire.

But too many people get discouraged by the "keep up with inflation" mantra, especially when they look at what their money earns in savings accounts and certificates of deposit. They fall into the trap of buying risky stocks for "growth," or they allow low yields on bonds and Treasuries to give in to the human impulse to buy now instead of save something for the future.

It's better to have a retirement of savings with reduced spending power -- instead of no savings and therefore no spending power.

By Oliver Gillies

Before entering into the markets at any level it is crucial to have a working knowledge of the dynamics of the stock markets and the main influencing factors.

These will be briefly touched upon. The main influencing factors are likely to be economic, such as inflation, interest rates and GDP. A variety of other factors are likely to have an effect, relating to possible geo-political factors (i.e., wars, civil unrest), also political uncertainty generally has a profound effect on the markets.

From this we can see that there are a wide variety of variables that are going to affect the markets as a whole which will ultimately determine the supply and demand of direct equities.

There are a general set of principles that you should adhere too constantly in order to reap the rewards that the stock markets have to offer, below I will outline some of these universally accepted principles for experienced private as well as institutional investors.

•Set a concrete nominal value you can realistically afford to invest. For example if you go out to the bookies to bet on the horses you would generally have a set amount to spend and once you reach that level cut your losses or cash in. What I am trying to convey is discipline and routine which is essential for consistent returns.

•Do not treat the stock market like the lottery. It is a skill that needs to be mastered and perfected to “trade effectively”. Be in it for the long term and like anything in life essentially the more skills you build the more effective you will be.

•Eliminate as much risk as possible by doing your homework on a stock you are going to invest in. Information is freely available more so than ever especially on the internet. You will be able to locate company accounts and assess the general health of a company through a variety of sources.

•Diversity is truly the key in the markets. All the big guys know this in the markets usually “hedging” their large position’s with an inverse position or more stable position. Do not put all of your egg’s in one basket as they say equally spread capital over a number of positions.

•If you loose money on one position it’s not the end of the world all of the massive guy’s the Karl Icon’s and Warren Buffet’s would have if not still loose money in the markets. Try and look at every event as a learning experience on which to add to your arsenal of skills.