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Is the Force with You?

Published by: Jeff Hall, CFP® Date: April 21, 2016

Picture1I turned 4 years old in the summer of 1980. That same time, the Star Wars classic “The Empire Strikes Back” was released in movie theaters and I vividly remember my mother taking me to see it one afternoon. My son turned 4 a few weeks ago, so I was looking forward to taking him to see “The Force Awakens” Needless to say, the anticipation about the movie was building in our family. Our house looked like a Jedi training facility with all of the light sabers lying around.

The average adult ticket price for a movie 35 years ago was around $2.70. Add another $2.00 for a child’s ticket and the grand total for my mother and I was around $4.70. Fast forward to 2015, and tickets to the movie for me and my little boy will be about $18.25, an increase of 3.95% per year. Of course, that’s not counting the refreshments which will require a second mortgage.

During this 35 year period, inflation (measured by the consumer price index) rose about 3% annually-a growth rate less than those of healthcare, education and apparently movie tickets. All of us want the economy to grow because it benefits our standard of living. However, a growing economy also means rising prices for things we buy. Furthermore, when the government tries to make products and services more affordable it tends to backfire because whatever gets subsidized also grows. For this, look no further than higher education costs, housing, and healthcare.

Regarding the capital markets, the same 35 years referenced above produced the following results for different types of investments: 1 Month Treasury Bills – 4.50%; Investment Grade Bonds – 8.10%; US Large Stocks – 11.22%; US Small stocks – 10.30%; International stocks – 9.08%.

Over the last 35 years, it didn’t take much investment risk to keep up with the cost of living; however, it’s hard to believe that the next 35 years will produce the same results, but no one knows. This does not suggest that we should avoid investing in the capital markets. It does imply that broadly diversified, low cost, tax efficient investments are more meaningful than ever because of the possibility of lower returns in the future. It also means that we better know what we are investing for because if returns over the next decade aren’t commensurate with history then our emotional fortitude will be tested when volatility returns, much like it did in August and September.

The anticipation of this new movie built to a crescendo for Star Wars fans like me. I was excited to share this experience with my son and see the excitement in his eyes when we travelled to “a galaxy far, far away.” Someday, it will be his turn to enjoy the thrill of passing this story onto his children. It will cost him $71, if the next thirty five years look like the past thirty five years. “The Force”, of inflation, will always be with you, but a sound investment strategy can overcome and allow for shared moments with those you love.

Jeff Hall, CFP® is a Partner and Senior Advisor with Rather & Kittrell. He is available at jhall@rkcapital.com