This is Why You Invest
I was having a conversation with my parents the other day and, as often happens these days, the subject turned to the housing market. And for good reason. Some of the anecdotes and statistics we’re hearing are bonkers.
Zillow is now reporting that nearly half of all homes are selling in less than a week, with certain markets showing even faster results. Columbus, Denver, and Salt Lake City are now seeing 70% of all homes sold in a week or less.
Because houses are selling so quickly, their prices have skyrocketed. Home prices are up a record 24% year over year and most homes are still selling for over the asking price. Aside from just the numbers, there are crazy stories like buyers submitting a written pledge to name their firstborn child after the seller. Or a buyer in Texas who not only paid for the new house in cash but also bought the home the seller was moving into.
While homes have been getting most of the attention, other areas of the economy are also seeing shortages and inflated prices. Airline tickets and hotel prices are rising significantly to meet demand. Gas prices are increasing. I know a few friends who’ve recently sold their used cars for more than what they bought them for. Across the board, inflation expectations continue to rise.
After talking through some of these wild stories about housing and inflation, my mom ended the conversation by nonchalantly saying:
“Well, what can you do?”
Now, I know this was more of an offhand comment along the lines of “it is what it is” rather than a serious question, but I couldn’t help but think of the question directly. And in that moment the answer rose to my mind easily.
You invest. That’s what you can do.
Rising prices and things getting more expensive over time is the very reason why saving into a bank account or putting money under your mattress won’t cut it.
Since 1928, the U.S. stock market is up 9.8% per year while inflation has averaged around 3% per year. So stocks have grown at nearly 7% more than the rate of inflation.
The S&P 500 has compounded at about 14% per year for the last ten years. That rate of return would turn an initial $100,000 investment into $370,000 if left alone. Inversely, if you’d have put $100,000 in a bank account ten years ago you’d still just have $100,000 today.
Stock market returns can take your savings and keep them competitive with the prices in today’s economy. They allow the dollars you’ve put away in years past to keep their purchasing power. When prices in various areas of the economy are running wild, it’s comforting to know that you have investments keeping pace.
As prices go up, your money has to go up too. That’s why you invest.
Thanks for reading!