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Measuring Investment Success
By John | November 5, 2011
How do you measure your investment performance? If you invested $10,000 and received back $20,000, was that a good performance? Possibly not.
Why? Because the standard of measurement you are using, when you measure performance in dollar terms, is flawed. The IRS would like you to measure performance that way, because they do just fine. But you might not be doing so well.
“Money” performs three basic functions. It is a medium of exchange, a standard of value, and a store of value. As a medium of exchange, the U.S. dollar has done well for many years (up to now). However, as a measurement of value, and as a store of value, it is failing badly. Because of that, I suggest that you shouldn’t use the U.S. dollar as your “money.” It distorts your investment performance.
In the above example, if you invested $10,000 and received $20,000, the IRS will tax you on $10,000 of income. That is OK, if both transactions occurred on the same day. However, if it occurred as little as one year apart, you did not receive a $10,000 gain. If, as some will point out, the U.S. dollar is losing purchasing power at a rate in excess of 10% per year, that $20,000 you received back at the end of one year is now only worth 90% of $20,000 (or $18,000) in terms of comparable purchasing power to what dollars were worth at the time the original $10,000 was invested. In other words, you are paying income tax on a $10,000 “profit,” when you only profited in the amount of $8,000.
What if you had held this investment for several years? At 10% annual inflation, you would only be breaking even if you received $20,000 back on a $10,000 investment in about 6 ½ years. In this case, you paid income tax on a $10,000 “profit,” but had no profit at all!
When you invest in stocks, bonds, bank CDs, real estate, precious metals, etc., and measure your performance against dollars you may be receiving fictitious profits. So, how do you measure your performance? Against real money – against gold and silver.
Everyone complains about the cost of gasoline today. Do you realize that gasoline, as measured against silver, is cheaper today than it was 50 years ago? I remember when it cost about three silver dimes to buy a gallon of gasoline. Those three silver dimes today will buy a lot more than a gallon of gas.
Several states are contemplating making gold and silver legal tender, and disallowing the taxation of gains on “investments” in gold and silver coins, as those gains are not profits, but merely the depreciation of the value of the dollars against which those coins are measured.
We are experiencing persistent deflation in the U.S. today. That means that the true value of many things is going down, as the massive debt expansion of recent decades is unwound. Some of that deflation, such as in the value of single family homes, is being recognized. However, as more and more dollars are created, backed by nothing other than empty promises of the issuer, the true decline in value of many asset classes is being camouflaged.
At the same time we are experiencing asset deflation, we are experiencing currency inflation. That is how the deflation is being masked. Everyone measures the value of his assets in dollar terms. As those dollars become more plentiful, and worth less and less, their purchasing power declines and distorts investment performance.
So, how should you measure your investment performance? How do you value your assets? I suggest you use traditional money – gold and/or silver. How many ounces of gold or silver did it take to acquire this asset in the past? How many today? Continue to use that criteria in the future, as you monitor your investment progress.
However, you may want to use this measuring device with one caveat. As the public continues to recognize that fiat currencies are becoming worthless, there will be a flight out of currencies and into precious metals. As this occurs at an accelerating pace, you might expect the demand for, and relative “price” of gold and silver coins to accelerate.
In other words, currencies are currently overvalued. Gold and silver are undervalued.
So, what should you be holding in your investment portfolio?
Topics: Uncategorized | 1 Comment »
November 6th, 2011 at 5:12 am
What should we hold in our investement portfolio?
Gold and silver, of course, that is what we should understand from your article ..
This is not quite a vacant land investor advice..
You cannot eat gold and silver at the end of the day. Your opinion, that I respect, is that gold is undervalued, others has different opinions, for instance Roubini said: “Gold is in a hyperbolic bubble”
Your point is right, when you measure investment performance, you should relate to more references as yesterday, but, to take inflation into account is just the basic finance lesson “the time value of money”..