Learning To Factor Cost Of Living Into Your Investments

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Are you old enough to remember the cost of food, clothing, and housing back in the 1930's, the years before World War II? If so, you know that prices in the late 1950s are a great deal higher. If your memory does not go back that far, you had better find out what happened to the buying power of a dollar, especially between 1940 and 1950, before you select investments.

Here are some highlights in the trend in cost of living, Bureau of Labor Statistics, a part of the U.S. Government. In the comparatively prosperous 1920s, after World War I, the cost of living was about four fifths higher than in the prewar years 1910-14, when business was rather poor. Then in the business depression starting in 1929, the cost of living dropped considerably, but in the late 1930s it was still about two fifths higher than before World War I. During and after World War II, starting in 1941, the cost of living rose rapidly, and the Korean War caused another spurt in 1951. By 1957, the cost of living was twice as high as in the late 1930s, and about three fifths above the 1920's.

Thus the cost of living has had spells of moving downward as well as upward, and sometimes for several years it changed only slightly. But the ups and downs did not balance out; the ups were considerably larger than the downs. Comparing the two low periods, the early 1910s and the late 1930s, the rise averaged a little less than 2 percent a year. And comparing the two high periods, the 1920s and 1957, the rise averaged about the same rate per year.

A saver, although well aware that a dollar now will buy considerably less than it did several years ago, is apt to forget all about this when selecting an investment. Or maybe he assumes there is nothing he can do to protect himself against a continued decline in a dollar's value. The government's talk about "security" encourages him to continue in his delusion.

What is going to be the future trend of cost of living? Of course, an estimate of future cost of living cannot be accurate. But judging by the record of the last 40 years, on the long-term average the cost of living will rise about 2 percent a year. This means that if you put a $100 bill into a safe-deposit box today, in 10 years its buying power will be $17 less than today; in 20 years it will be $29 less than today, and so on for longer periods.

Instead of just holding the cash, suppose a saver buys an E bond for $750, and redeems it in 19 years. Including appreciation, he will receive $1,347. But most of the appreciation will be offset by the estimated 2 per cent annual rise in cost of living. In buying power, the $1,347 will be worth only as much as $825 was on the day he bought the bond. Similar results are to be expected from any of the popular "safe" investments, such as life insurance and deposits in savings institutions.

Anyone limiting himself to fixed-price investments, no matter how sensible and conservative he feels, is actually gambling that the cost of living is not going to rise, and over the long term, he is likely to obtain sorry results.

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