Tag Archives: inflation

Are Markets Efficient?

When investing your money you’ll hear many different forms of opinion. Experts like Dave Ramsey will tell you to invest in growth stock mutual funds, others will say that index funds are the way to go. Then there is a group of investors that says you can beat the market by buying “undervalued” stocks.

The question that arises is, is there such a thing as an undervalued stock, and if so, is there a reliable way to take advantage of this “market inefficiency”.

Your investment philosophy in stocks is largely dependent on your opinion on what’s called the Efficient Market Theory (EMT). This theory states that markets are fully efficient. In other words any given price in the markets reflects the cumulative “wisdom” of all investors actings logically on fundamental data regarding value.

Essentially the market, according to this theory, is always acting completely logically based on the current information. So at any given point the market isn’t overvalued or undervalued – it’s priced at the fair equilibrium price given the current information available.

Some practitioners and theorists have brought up concerns with the theory stating that it doesn’t accurately reflect the actual results we see in the real world. For example, in the tech “bubble” of 2000, were investors acting completely logically on the market’s information or was there inefficiency?

Ultimately you’ll have to make your own determination. At the moment there isn’t unanimous agreement by the community.

Becoming the Squirrel of Personal Finance: 4 Places to Stash Your Cash

Most folks around the world understand the concept of saving more; you can only increase savings when you either increase income or decrease spending. However if instead of investing, what if one were to put the money into savings? Where should they put it? That’s what I’d like to explore.

When considering where to put your savings there are two main factors: Risk of Inflation, and Risk of the Need for Capital.

Risk of Inflation:

When you put money into savings there’s not really a real risk of losing your money to a drop in the stock market. That’s a good thing. But the risky part is that with slower interest and growth on your money, you’ll have a harder time keeping up with inflation. Often the savings interest won’t even be enough to cover the different.

Therefore with saving there is always a risk your purchasing power can do down.

Risk of the Need for Capital:

What if you put money in a CD (Certificate of Deposit) and find out a few days later that you need the money for an emergency?

First, at least some of your money should have been in a liquid asset for emergencies. But secondly, if you have to take the money out, a CD will usually penalize you. So you should always be aware of the chance you’ll need the money and what you’ll do if you do.

With those to risks in mind, the need for capital and inflation, let’s explore the options for saving:

Conventional Saving Accounts

These usually command the lowest interest rates because of the relative liquidity of funds.

Online Savings Accounts

These are online accounts that you set up in which you usually receive higher rates of interest because there isn’t any brick and mortar building to maintain.

Certificates of Deposit

These are the best for funds you’re sure you won’t need for a short period of time. For example if you know you’re going to purchase a car in 3.5 months, then maybe taking out a 3 month certificate of deposit isn’t a bad idea if it gives you are larger return of interest.


Decide your reason for saving and how much liquidity you’ll need. If you can stomach tying up your money for months or even a year at a time, maybe a T-Bill or CD is worth it. Otherwise, consider a regular bank account or Money Market.

Why Sometimes More Taxes are Good for You

How can more taxes be a good thing? Well taxes are something you pay either out of your earnings/income or your spending/consumption or when you die. So if we just look at the first type, income taxes, we can see that the amount of income tax you pay is largely determined by how much income you make.

I’m guessing you’d like to make more income this year. Specifically either residual income or capital gains income. So paying more income taxes can actually be a good thing; it means you have made more income.

Before you assume that paying more taxes is universally good I want admit that more taxes isn’t always better. For example if you pay sales tax on the purchase of a new car, that’s not necessarily good. Or if you forget to deduct retirement contributions form your income, that’s not necessarily good.

To be clear, income taxes should be reduced as much as legally possible. However overall, an increase in taxes probably means you’re making more money.

In conclusion, avoiding income tax at all costs may actually be a bad thing because it’s keeping you from earning more money. Go earn more money and eventually you may find that you kind of like the implications of paying more taxes.

3 Forces Standing Between You and Your Financial Goals


Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).


You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.


Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!

Money: Where it Comes From

Most people like money. They either collect it, or simply view it as a means to buy their next meal. The fact remains: money is useful. But why do we used money and where did it come from?

It is commonly thought that money arose as a result of the need to barter. This isn’t necessarily the case. There isn’t any society that we know of run completely on barter, even in ancient times. However people did barter a little, and the rest they either gifted or gave away as a form of debt.

At some point the use of debt was coupled with the use of commodity currency. Depending on the people group or the time period in which it was traded, money could be shells, wheat, precious metals, and eventually physical coins. It was after this first occurrence of coins around 600 B.C. by the Lydians that coins started to become more commonly used.

As time progressed, and more and more groups of people used coins, a representative form of money emerged. This was basically paper or some other useless thing, that was available to trade for something of value, like gold. These “certificates” became more and more widespread.

Other societies have since gone back and forth between representative money and actual commodity currencies. The U.S. started out with gold and silver coins as its money. At some point it started a gold certificate or what’s known as “the gold standard”. These could be traded in for a physical amount of gold. Then, with the actions of President Nixon, the gold standard was abolished and we have since been using what’s called fiat currency.

Fiat Currency is just paper, or electronic money, that can’t be turned in for any amount of gold or silver. The only way it has value is because the government says it does. The very nature of fiat currency, as with most currencies, is one of inflation. Since we have gone off the gold standard, prices have “gradually” gone up. What used to cost $1 now costs $10.

The beauty of our current system is that instead of bartering or becoming indebted every time we want something, we are able to trade currency for things of value. In giving someone a dollar, we are giving them something that is widely able to be “traded” for something else of value.

While our system of money in the U.S. certainly isn’t perfect, it has done a great job in facilitating the transfer of assets, resources and services from one side of the economy to the other.

The Purpose of Investing

The whole purpose of investing is to turn money into more money – it’s to be able to buy more things than you bought in the past. However, why not put all your money into savings? If I can lose “all” my money in the stock market, why not play it safe and keep everything in savings? There are two reasons. 1) You probably want to grow your money, not simply keep it safe. And 2) the value of money goes down over time. Wait, you might be asking, isn’t $1 always worth $1?

Yes and no. While $1 will always be the same, the amount that $1 can purchase generally goes down over time. Let’s use an example. Let’s say you have a small collection of 10 Legos. While you really love Legos, you only have these 10, so you tend to be really careful with them – you like them a lot.

One of your friends offers you an apple for one of your Legos. You refuse because you don’t want to have 9 left. However, a few months later, after Christmas and a birthday, you have received 36 more Legos. Your friend comes to you again and asks to trade one apple for two Legos. While you don’t like the idea of giving away more Legos, you don’t mind as much any more because you now have 36. So you do the deal.

What changed? Why were you willing to give more Legos up for an apple when before you wouldn’t even trade one for one? That’s because the Legos became less rare. This has to do with supply and demand. While demand for Legos stayed relatively the same, the supply increased, which decreased the value of the Legos relative to the apples.

We could get really technical with economics but for now the general principle can ring true with money as well. As the amount of money out in circulation, both physical and electronic, increases, the perceived value, and therefore the purchasing power of those dollars, decreases. In the last 100 years, inflation has gone up at about 2 to 4% per year.

The scary thing is that inflation continues even when your money isn’t growing. For example in 2008 when the whole real estate market and stock market crashed, inflation continued. Meaning, not only did stock investors lose 37% on their money, they also lost an additional 3%+ in purchasing power! Ouch!

In times of great economic panic gold often increase in price because it can act as a fear mechanism for investors when times get tough. When people in the market see inflation increasing and economic certainty decreasing, they often view gold, which has been used as money for literally thousands of years, as a safer location for their money.

The bottom line: real estate and stocks are fantastic investments for anyone looking to outpace inflation over long periods of time.