As a physician, I sell my time for a salary that roughly translates to an hourly wage. I save my unspent money using various assets that should hopefully outpace inflation so that I have more assets in the future because of their growth. This method of saving has more in common with investing as most of the available means of saving money involve exchanging dollars for investment assets (shares in companies, bonds, or other cash-flow positive assets).
Most of us measure our success against the “market return” and since consistently beating the market is so difficult, we often buy the market through broad based low cost index funds.
Despite such a disciplined and regular approach, many physicians still feel that they are treading water financially. When measuring their savings against quality assets such as real estate in desirable neighborhoods, child care, higher education, medical care, and many other scare services, our purchasing power has only decreased. Many physicians now spend close to as much time on their side hustles as they do their professional career. Dual earner households barely fix the issue as more time working means more need for services to support the working family.
The reason stems from the fact that saving and measuring success against a “market return” is the wrong metric. We are playing a game similar to monopoly where every time around the board, the total amount of money increases but we are all chasing the same amount of scarce resources. When the money supply increases greater than the amount of goods and services, we experience inflation. If you save 10% more and the money supply increases 10% then you ability to purchase goods and services has stayed the same. If your investments grow by 10% and the money supply increases by 10% have not gained anything.
Everything gets more expensive despite all your sacrifices.
With goods, more efficiencies in production allows prices to remain stable relative to inflation. With services and scarce resources, there are limits to how efficiencies can keep up with more money on the monopoly board. This is why consumer price indexes (CPI) affect people differently at different stages of life. Few new houses will be built in desirable neighborhoods and few new excellent universities are being created but the global money supply is still chasing those finite services. Figure 1 captures this divergence between goods and services as represented by inflation. The purple, blue and green lines represent tuition/child care, housing, and medical care. These services far outpaced the reported CPI.
Figure 1. Services and housing increases substantially more priced in dollars than the CPI.
Since global money is spent globally, anyone from anywhere in the world can buy a house in a desirable neighborhood and compete for healthcare services. Great universities compete for global applicants. Services from vacation rentals to healthcare compete for a portion of the global pool of money. We should measure our financial success against global money supply (M2) growth. If we just keep up with M2 growth then we have run in place. If we fail to keep up with M2 growth than we have financially fallen behind. If we exceed M2 growth than we have improved our future only as long as we stay ahead of M2 growth forever.
Unfortunately the S&P500 tracks the global M2 money supply (figure 2). The more money in the system, the more “productive” a company appears to be as the revenue increases because of an increase in the global monetary units. More money in the system will naturally increase a fortune 500 company’s revenue. This means that all our indexing has only kept up (but not exceeded) money supply growth. As money supply increases at a compound annual growth rate of 12%1 and everyone indexes the same way, we all just tread water together. Global money roughly doubles every 6 years. If we have not doubled our savings or our earning power at that rate, we have fallen behind. The only way most of us feel we can keep up is to pick up more shifts, work more side jobs, and increase the earning power of both spouses. All of this extra work increases the likelihood of burnout.
Figure 2: Global Monetary supply vs S&P
Fortunately, there is solution to this problem and indexing will not solve it unless you can expertly pick the best indexes that outperform the S&P500 which tracks the global money supply. Blackrock (iShares) has provided an excellent graphic (figure 3) demonstrating the performance of many asset classes with only a few in combination maintaining an annual growth rate of greater than money supply growth.
Figure 3: Global asset performance. (BTC = bitcoin; SPX = S&P 500 index; HY = US High yield corporate bond index; AGG = US Aggregate bond index; EM = Dow Jones Emerging markets index; CMT = Dow Jones Commodity index; Gold = 1oz gold price)
I’ll leave you to draw your own conclusions about how to diversify and save for the future. A few model portfolios are available below and demonstrate how even a small allocation to bitcoin will substantially beat the growth of the monetary base and ensure a prosperous retirement.
Figure 4: All Season’s portfolio
Figure 5: 60:40 portfolio
Figure 6: Permanent portfolio