What to fear: day to day stock quotes or long-term inflation?

Some investors obsess over the day to day and week to week fluctuation in the prices of their investments. Their attention is misplaced, says billionaire investor Warren Buffett.

Instead, Buffett says investors need to look at two trends: the long-term growth of the stock market and the never-ending threat of inflation to an investor’s purchasing power.

Buffett illustrated those concepts very neatly in the recent 50th anniversary annual report of his company, Berkshire Hathaway. The Standard & Poor’s 500 Index, a good proxy for large U.S. stocks, has gained almost 11,200 percent (with dividends reinvested) since Berkshire Hathaway was founded, he noted.

Meanwhile, the dollar lost 87 percent of its purchasing power due to inflation. Keeping money in the bank over this period would have resulted in a permanent loss of purchasing power. Investing it and ignoring the gyrations of the market would have led to a real increase in capital and purchasing power.

Richard Schroeder CFP®, April 8, 2015

Richard Schroeder
Richard Schroeder