Does Investing Mix with a Great Depression?

I recently ran across a very intriguing question posed by a young chap - a Gen Zer - about the risks of investing. It seems that he had heard we might be on the brink of another "Great Depression."

I recently ran across a very intriguing question posed by a young chap - a Gen Zer - about the risks of investing. And he wasn't just asking about "typical" risks, like investing in a company's stock that goes bust. He, like many members of his generation, are growing up during an era when they are constantly bombarded with frightening scenarios - real and Internet-produced - that have them living slightly on edge. It seems that he had heard we might be on the brink of another "Great Depression." If so, he asked, what happens to all of the money invested in the stock market?

There are No Dumb Questions

Radio and television personality, Art Linkletter, wrote a bestselling book titled, Kids Say the Darndest Things. The idea for the book was in response to his young son’s comment that he wasn’t going back to school after a disappointing first day in Kindergarten. “Why not?” Art asked. His son, Jack, replied, “Because I can’t read, I can’t write, and they won’t let me talk.”

Youngsters, even older youngsters, often have thought-provoking ways of looking at things… stimulating others to ponder such outlooks. What if another Great Depression comes, wouldn’t all that investing go to waste? Perhaps, but let’s consider the prospect of starting to save and invest while very young. Reminds me of that old adage: The Amazing Power of Compounding. Yeah, I know, you’ve heard me mention it before. But, yes, the younger you start saving and investing, the higher the payoff. For example, if you save and invest $100 per month, earning 7% per annum, compounded annually, here’s the theoretical retirement nest egg you might accumulate by age 65 (before taxes and inflation):

1. Beginning at age 20, you’ll have $357,867 upon reaching age 65.

2. Beginning at age 30, you’ll have $173,177 upon reaching age 65.

3. Beginning at age 40, you’ll have $ 79,290 upon reaching age 65.

Now, if another Great Depression does come, wouldn’t you rather be in the middle of accumulating a nest egg of sizable proportions than not? The longer you wait to save and invest the more financially unprepared you are to experience a depression, a recession, or just the ordinary run-of-the mill economic cycles that constantly bombard the marketplace. And in the event of such setbacks, perhaps you could salvage a portion of your portfolio. Assuming you have a good plan, investing is never a waste of time.

Those Disappearing Dollars

As to the question, “And how does our money just disappear anyway?” Well, in order for it to disappear, you must earn it in the first place. And there are a variety of ways for it to disappear. Million Dollar Habits will get you there about as quick as anything. A poor investment plan or strategy can chew up dollars fairly quickly, too. Just plain bad luckoften chews up a chunk. And despite following best investment practices throughout your working career, that ravenous old dude, Izzy the Inflation Monster, and his free-spending sidekick, Uncle Sam, are magicians at making your money disappear.

Dwindling Spending Power

Previously, I mentioned that if you began saving and investing $100 per month, earning 7% per annum, compounded annually, you would have $357,867 at age 65 before inflation and federal taxes. But what if Uncle Sam taxed you at a marginal rate of 25%, and what if the inflation rate over that 45-year period had averaged 2% per annum? Taxes would transform your ending balance to $212,516 and the distressing combination of taxes and inflation would reduce your spending power to $87,173.

Well, your $357,867 didn’t completely disappear, but once Sam takes his cut and after being subjected to the ravages of Izzy the Inflation Monster, you are left with an anemic purchasing power of $87,173 in retirement. In short, $4 in savings is reduced to $1 in purchasing power.

Perhaps you should start saving and investing at age 10.

Just a thought.