The Cost of Doing Nothing

In today's extreme bear market, the urge to hide all your cash under the mattress can be pretty strong. Why invest in a market that can produce such horrible losses?

Inflation is the nasty phenomenon that will eat at the purchasing power of your cash year after year. The Consumer Price Index (CPI) is tracked by Statistics Canada and shows the rate at which the prices of goods and services has changed. An inflation rate of 2% means that in general, something that costs $100 in one year will cost $102 by the next year, reducing the purchasing power of your 100 dollars. The Bank of Canada targets an inflation rate of 1% to 3%, but we have seen double-digit inflation as recently as the 1980s.

What does this mean for your $100 if you stash it under your mattress and take it out again when you retire in say 30 years? Let's say you put $100 away 30 years ago in 1979. The average annual rate of inflation over those 30 years was 3.69%. According to the Bank of Canada Inflation Calculator, something that cost $100 in 1979 would cost $296.59 today. Another way to look at it is that the value of your initial $100 would be $33.72 after the effects of inflation. That's a 2/3 reduction in the value of your money!

So in order to preserve the purchasing power of your hard earned cash, you simply must invest and at least keep up with inflation (after paying taxes on your earnings).