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The Decency of a Bear Market vs the Rudeness of Inflation 

When thinking of threats to financial plans, bear markets get all the attention. But there’s a sneakier, and potentially more dangerous, threat to most household finances: inflation.

Bear markets at least have the decency and courtesy of showing up on your balance sheet at the end of the quarter. 

Inflation, not so much. It infiltrates itself into your finances without so much of a warning or disclaimer. 

In the US, inflation is measured by the government, and is reported most commonly as the Consumer Price Index (CPI). The US Bureau of Labor Statistics contacts thousands of stores, establishments, offices, and others to record the prices of about 80,000 items each month. The Bureau then reports on the findings and establishes price changes. 

Inflation averages right around 3% a year - but in some years it’s non-existent, and in other years it might be higher. This means that a loaf of bread, a gallon of gasoline, and a roll of toilet paper generally costs more over time. And so a family with a non-increasing income stream is going to struggle to pay for expenses as those expenses increase. See the danger? 

Inflation is especially dangerous when investing in low-interest investments, like CDs or money markets. People being TOO conservative may actually be realizing a negative rate of return, after counting inflation. 

I’m not minimizing the effects of bear markets - they’re no fun at all. But at least we know about them. They’re kind of like when a window get broken from a hail storm in your house. It’s pretty obvious.

Inflation, though, is like a window who has a bad seal, and whose energy efficiency is slowly costing you more money to heat/cool your home. Unless you plan for it and look for it, you won’t know.

The past few years we’ve seen pretty low inflation in the US - but it’s wise to plan for a more historical average over a longer period of time in the future. 
Interesting Resources 

1. Mr. Money Mustache - Our Shared Ongoing Battle to Not Buy a Tesla
Aside from the fact that I have a Tesla X (solid black, performance package, onyx black wheels, seven seat interior layout with white & black leather if you’re reading, Elon), on my big dreams list, I appreciated this article because of the introduction of the term Purchase Justification Machine - the ongoing thought process our mind uses to make purchases seem smart. PJM’s can, as the author states, be very useful - but they also can trick us into buying something we don’t really need, or can’t quite afford just yet. On the flip side, PJM’s can work great in coordination of rational roadblocks - a way of prioritizing things that need to happen first. Great read. 

2. Dimensional Funds Perspectives - The Uncommon Average
The S&P 500 Index has averaged a 10% annual return from 1926. But short-term results vary - a lot. In fact, of the past 93 years, the actual return in any given year has only been within +/- 2% of that 10% average a total of 6 years! This means that most years the return is drastically higher or lower by a wide margin.* This is what people mean by saying invest for the long-term. 
If you’re curious to play around with historical cost of things, this website is an enlightening tool, with information on pricing going the whole way back to 1913. 

As always - thanks for reading. And a special Happy Mother’s Day wishes this weekend!


Gratefully,
Jeremy
*In US dollars. S&P data © S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Past performance is no guarantee of future results. Actual returns may be lower.
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