Don’t get mad, buy companies!
September 12, 2012 by Dave
Filed under Finance for youth, Investing, Mutual Funds
It is common to hear people complain about the rising costs of living. “Can you believe the price of gas these days!” or “my grocery bills never go down, only up!” are a frequent refrain. How can you turn the tables and benefit from rising prices?
Except for government monopolized services there are companies behind all the goods you buy and all the services you use. If prices are rising, it indicates either that:
- the government is creating too much money and causing inflation;
- the government is pushing money at one area and distorting the normal, healthy price signals;
- demand is exceeding the available supply and prices are rising to signal for more investment in production.
Let’s say the cost of owning a car is rising – the car itself, the gas to run it and the price of insurance are the three biggest drivers of this cost. How can you offset these? You could own equity investments such as an equity mutual fund that may well own shares of car companies such as Toyota, Honda, Ford or Hyundai; shares of insurance companies that are charging you rising premiums to offset the declining interest rates they earn on their reserves; or companies involved in energy exploration and development, refining, distribution or retailing.
Simply put, for most rising costs there is a rising revenue to keep the company on a solid footing. If you save and invest part of what you earn, you have a clear opportunity to share in the rising revenue streams generated by businesses of all sorts from all over the world. The more you invest in the ownership of diverse businesses, the more you are protected from rising costs. This can be especially important during retirement, when your income may not rise as fast as does the general cost of living.
Don’t get mad, buy companies!