Tag Archives: buying power

Buy and Hold

As the equity investment market in Canada is in strong decline as of late I am doing a few posts on investing concepts.  I strongly recommend you follow the series in sequence.  I started Sunday with some high level concepts and focused yesterday on equity investing.

Don’t need the capital, hold!

The object of investing is  to provide fuel for the economy while making some money for yourself.  Invested funds are used to produce products or services which are paid for with money which is used by the producer to pay wages, produce more product and services, return money to investors and buy other stuff.  This in turn puts more money in the economy and everything spirals up.

When you provide capital to fuel the economy, as noted yesterday, even if the investment drops in value (unrealized loss) as long as you don’t need the capital back you can hang on until you have an unrealized gain.  You could then sell and realize the gain or not and just continue to hold the investment.

Why would you do this?

The intent of investing is to make money.  This can be from dividend/interest payments or capital gains.  The goal is to have optimal returns and if you can grow your funds through all all three ways (dividend, interest, capital gains) of course this is a good idea.

That being said, if you buy the investment and get a solid steady continuous  return with little risk without fooling around with the capital by just gathering income, than why not.

And the Point

These days of doom and gloom, the media is screaming about the economic downturn and capital losses in the equity markets (among other bad things).  The reality is, if you don’t sell your capital investment you don’t lose anything.

In fact, a possible but exaggerated example might be the case where you invested $1 million in a bunch of blue chip stocks with dividends of 10% or $100,000 a year.  From today, the capital value of the stocks might drop to $500,000 (don’t sell yet so not actual loss) and five years from now it might be $2 million.  If you hold the investment for 5 years you will earn $500,000 in dividends and then $1 million in capital gains (if you sell at that point, I would probably still hold).

All just because you held on.

The Caveats

Of course if the company stops paying a dividend or goes bankrupt you will ultimately lose.  The thing to consider though, is how likely is this for blue chip stocks (it does happen but not often) and if it does there are probably more problems – big companies collapsing can’t be good all around.

And the final word is, obviously if you are leveraged (owe money) or have an unexpected need for the capital then this approach does not work.

If you can follow the buy and hold approach, though it is not guaranteed the likelihood of  a reasonable reward is a decent possibility.

 

How much is something worth

Out of curiosity the other day I decided to check the purchasing power of my annual income of my first job (in the 1970’s) with today.  My starting salary for a management training role for a university graduate was $9,800.   According to the purchasing power calculator at “buyupside” this would be about $41,000 in 2014 dollars.

A check of “payscale.com” shows a starting level income of $34,000 to $48,000  for a newly graduated BSc ( IT roles) .   The range quoted is based on 4 different role types.  (I have excluded Sr level and Mgmt roles and considered only the lowest end of the salary range for the other roles).

So, my first job’s measly $9,800 a year was right in the range of what a new BSc. might get in today’s dollars.  This is not an exact comparison as my first job was in Financial services not IT but it gives an indication of how things line up from 40 years ago to today, in terms of what things are worth.

This is just one example, but for me anyway the purchasing power of my annual income in my first job out of university maps to that of someone today with a similar degree.

So how is the worth of things determined.  I mean when I started work I bought my lunch at the pub next door to the bank branch where I worked for under $4.00 a day (including the beer).  Today an equivalent lunch (including the beer) would be $15.00.   Similar food and beer, very different assigned worth.  That is to say I am willing to pay $15 for the same thing I paid $4.00 for only yesterday (well 40 years ago but who is counting).

Why am I willing to pay the higher amount?  The most simple answer is because I can.  This is what purchasing power is about.   I have easily enough money to buy the lunch at today’s rate as I did back 40 years ago because I am paid so much more in today’s dollars.  This as we all know is inflation.

Whats the Point?

Fair question.  Today’s post is really just background for a series on the value of things, inflation, deflation and other economic calamities.

Check in  tomorrow more thoughts on these topics and deeper exploration of what the impact of changing buy power is.