It's Not the Crash That Costs You. It's the Cash.

SUMMARY

Joe Brown, a former stock broker and financial educator, explores the long-term risks of holding cash versus investing in assets like stocks, bonds, and gold. He emphasizes the impact of inflation on purchasing power and discusses strategies for generating cash flow while managing risk.

MAIN POINTS

• The purchasing power of the US dollar has declined significantly over the past century, with $1 buying much less today than in previous decades. [1:02]
• Holding cash or cash equivalents may seem safe in the short term, but over longer periods, inflation erodes value and increases the likelihood of real losses. [3:02]
• Investing in stocks carries a higher short-term risk of loss, but over 20-year periods, the odds of losing money in broad stock market investments approach zero. [6:00]
• Stock market volatility and drawdowns are normal, with the average annual drawdown since 1950 being nearly 14%, while average annual returns are about 11.7%. [9:01]
• Bonds offer lower short-term risk than stocks but are still vulnerable to inflation and interest rate changes, limiting their real return potential. [11:00]
• Blending stocks, bonds, and gold can balance risk and income, but alternative cash flow strategies may offer higher upside without sacrificing growth. [13:02]

DETAILED ANALYSIS

Over the past century, the US dollar has experienced a dramatic decline in purchasing power, as illustrated by the rising costs of everyday items such as chocolate bars, soda, and coffee. This persistent erosion is primarily attributed to inflation, which has accelerated during periods of significant monetary expansion, such as after the Federal Reserve's creation in 1913, the abandonment of the gold standard in 1971, and the stimulus measures of 2020. Even assets considered safe, like cash, savings accounts, and Treasury bills, are subject to this loss of value over time.

Historical data shows that over a 20-year period, there is roughly a 50% chance that cash or T-bills will lose purchasing power, despite nominal interest payments.

In contrast, equities present a paradox: while short-term investments in stocks are prone to volatility and potential losses—about a one-in-three chance of loss in the first few years—long-term investments in broad stock indices have historically approached near-zero odds of loss over 20 years or more. This is due to the underlying growth of businesses and their incentive to generate profits. However, individual stock risk remains, as evidenced by the failures of companies like Sears and Radio Shack.

Stock market drawdowns are common, with an average annual decline of nearly 14%, but the average annual return since 1950 has been approximately 11.7%, albeit with significant variability from year to year.

Bonds, while less volatile than stocks in the short term, are not immune to losses, especially when interest rates rise or inflation outpaces fixed returns. The structure of bond returns caps potential gains, making them vulnerable to periods of high inflation. The ongoing expansion of the money supply, driven by government borrowing and persistent deficits, continues to fuel inflationary pressures, further challenging the long-term safety of cash and bonds.

Some investors seek to mitigate these risks by blending stocks, bonds, and gold, the latter of which has a long history of preserving purchasing power. For those seeking income without sacrificing growth, advanced cash flow strategies beyond traditional dividends and covered calls are presented as alternatives, promising higher upside potential in evolving market conditions.

LINKS

• Sign up for the free Tactical Cashflow Masterclass.
• Subscribe to the Letters From a Heretic newsletter.
• Recommended affiliate partners for financial products.
• List of Joe Brown's favorite books on finance and investing.

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