Understanding Definitions And Intents Of Asset Classes

Stock Shares:

The stated intent of a share of company stock is:  It is intended to represent a small percentage of ownership in something, usually a company.  A company’s articles of incorporation, the primary rules governing the management of a corporation in the United States, almost always specifically state the intent of the company is to make a profit, and one of the required duties of the company’s officers and management is to improve each individual share’s value (through increasing the company’s earnings per share).

Why am I talking about something that seems fairly basic and commonly known?

I’ll explain by comparing stock shares to the US Dollar:

The US Federal Government, in comparison, has no expressed or implied duty to see that the US Dollar maintains or increases in value.  This is also true for almost all other governments.

Why is this distinction valuable to understand?

Stock companies, at the least, are designed to improve share value.

The US Government, at the least, does not have a duty or strong interest to increase the value of a US Dollar.

Some stock companies are better than others at improving the value of their shares.  But most major stock companies, over the long term, improve their share’s value.

Neither the US Government, nor any government, has a similar interest to maintain or improve the value of their currency unit.

So, it makes sense, that over the long run, individual company stock shares have appreciated in price much more than the US Dollar.

So, if stocks clearly increase in value better over the long term, why not just use all your dollars to buy stocks?

From time to time, and sometimes for long periods of time (a decade or more), even the best-performing asset classes (like stocks) are overvalued and lose value compared to lesser-performing asset classes, like cash or bonds.

Why doesn’t the government have an interest increasing the value of their individual currency unit?

The answer to that question is extremely complex.  A starting concept to consider is:  The US Government is not running a business for profit.  For example, the US Navy has yet to finish one fiscal year where it turned a profit.  The US Government, whether we like this concept or not, is more analogous to running a household that has two parents, two-aging grandparents, a live-in security guard, a housekeeper, and six children, one who is special needs and another who is alternately-enabled.  In that “household” of 12 people, 4 of them are not even capable of working enough to “earn a profit.”

The US Government’s higher priorities are to use its currency to enable:  a) more profitable activity in the marketplaces and b) improve the country’s percentage of employment.  Additionally, when the dollar devalues, the country’s old debts are effectively reduced, because the new, lower-value dollars are paying off debts based on older, higher-valued dollars.

So, while you may have a reasonable hope or trust your government will provide Social Security and other safety net programs, you should not have any expectation they intend to keep the price of their currency strong.

This is true for nearly all national governments.  They are all weighing the question of “how fast to allow their currency to devalue?”  That is why you will rarely find countries whose currency is worth more now than it was 20 years ago.  It rarely, if ever, happens.

Does this mean a person should have most of their cash invested in stocks?

No.  Again, there are periods of times when stocks lose value, when stocks are overvalued.

Nevertheless, to understand the world of assets and investing, it is good to know the US Government has little interest in maintaining or appreciating the value of the US Dollar.

The US Government does not want to devalue its currency quickly, for many reasons.  High inflation wreaks havoc on asset trading and fixed wage employees and fixed income retirees (those last two groups make up a majority of the population).

So what does this mean practically?

If inflation is 2% per year, and you’re getting only 1% interest return on your FDIC insured CD, then understand you are losing value, losing purchasing power each year.

This is what makes the current QE programs so interesting.  The US Government, through its policies, is essentially making it unprofitable for the average person to “play it safe” and save their money.  Instead, the US Government is creating a paradigm where it is effectively saying:  If you even want to keep the value of your existing assets and savings, you won’t be able to do it in simple CDs.  Instead, you’ll have to invest in other assets classes – to even have a chance to keep the value of your assets, let alone to increase the value of your existing assets.

And that is why understanding how assets are valued, how they might gain value, and why they may lose value is maybe as important as ever.

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Disclaimer: These posts are not written by a professional or licensed financial advisor. There’s nothing for sale here. This is just a discussion forum. No one should make any decisions based on representations made on this informal blog. These posts are just one layperson’s opinions, concerns, and observations about asset classes – a part of larger, never-ending discussions. Any signigicant financial decisions should be discussed with at least a few trusted and experienced financial advisors before acting.

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