Money Madness : Germany 1923

Posted on December 3rd, 2008 in General, Investing, Money Madness

Why are so many people fleeing the stock market and  concluding  that treasuries and high quality bonds are the only safe havens?  There are at least two instances in history when this has not been true.  In the 1970s, bonds did not keep pace with inflation.  People lost their purchasing power while stocks preserved theirs.  A more decisive and dramatic example of this is Germany in 1923.   Bond holders there lost everything because of hyper-inflation, while stock holders actually made money.

There is a mystique about stocks.  They seem risky.  But what’s risky about investing in  companies that make products and services that we actually use?  If you invest in a broad portfolio of companies, most of them will survive any crisis because consumers will always need products and services.  Bonds, CDs and bank accounts, however, all have the potential of losing tremendous value in an, albeit rarefied, environment of hyper-inflation.  If a bond is a promise to pay you back in the future, what happens when the dollars are devalued?  Those dollars buy a lot less.  That’s the risk of being a  bond-holder in a hyper-inflated economy.

So given that there is a chance of losing money with bonds as well as equities, and we don’t have a reliable crystal ball, why not maintain a diversified and well-balanced portfolio?  It’s the only source of true safety in an uncertain world.