MONEY OBEDIENCE

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By avoiding the stock market you assume the risk called "purchasing power risk". Over time a dollar loses its value through inflation. You could buy regular gas 10 years ago for say $1.30 per gallon. Now you pay more than twice as much. If 10 years ago you had put $1.30 into a savings account paying you an average interest rate of say 2% after-tax during this time period, your $1.30 would have grown to an amount just shy of $1.60. You might have thought that playing it "safe" with savings would be the right thing to do, but you can hardly afford a gallon of gas today at $2.00. By playing it "safe" you assumed purchasing power risk. You may not have lost any real money - in fact you gained 30 cents to reach $1.60 - but you certainly have lost a bit of your money's power to buy things.

Savings accounts have little risk of instability, but they have hidden purchasing power risk. If you invest some or all of your money in a risky asset such as the stock market, you will assume some market risk since your savings can actually go down in actual dollars, especially in the short term. But by investing in markets such as the stock and bond market you can lower or even eliminate the risk that your saved money will lose the power to purchase things over the long term. On the other hand, if you do not invest any of your long-term savings in a riskier asset such as stocks or bonds, you leave yourself totally exposed to the risk that your savings will not buy as much as you thought it would when you are ready to spend your savings.