This is a guest post from Pinyo, author of Moolanomy, a personal finance blog about money, wealth, investing, and more. Subscribe to Moolanomy’s RSS feed here. In this article, Pinyo’s excitement about his net worth increase is tempered by the declining value of the dollar.
I just completed my September net worth review and noticed that I am actually less wealthy. While my net worth went up 1.24%, the value of U.S. dollar went down by 2.26%. You may think that this doesn’t concern you, but it does because we are an integral part of the global economy. For my family, this is even more important because we have direct financial dealings outside of the United States.
The realization that my wealth went down got me interested enough to trace this back to 2000. This period is particularly interesting for me because I have been beating the S&P 500 since then. From the chart below, you can see that market returns weren’t great, but they did manage to yield a 3.31% CAGR (i.e., compounded annual growth rate).
If you’d invested $10,000 at the end of 2000 in an S&P500 index fund, you would have about $13,000 on October 1, 2007.
Now, let’s look at the U.S. dollar against 3 major currencies: the British pound, the Japanese yen, and the euro.
Historical currency data from FXHistory: historical currency exchange rates
From the chart, you can see the value of the U.S. dollar against these currencies. In column G, I took the arithmetic mean of the percentages in column B, D, and F, clearly showing the declining value of the U.S. dollar. Column H is the result of actual S&P 500 performance adjusted for currency performance. Now our CAGR is only 0.51%!
From the perspective of the global economy, $10,000 invested at the end of 2000 in an S&P500 index fund, was only worth about $10,400 on October 1, 2007.
According to the Inflation Calculator from InflationData.com, the inflation rate from January 2000 to January 2007 was 19.91%. This means that most American investors are less wealthy now than they were in 2000!
What does this mean?
* This doesn’t mean I am going to make any immediate change. For instance, I wouldn’t start gambling in the foreign exchange market (Forex). To me, currencies are not investments. They are speculative, and not suitable for lay investors like me.
* I am glad to have 30% of my portfolio in international funds. But, this doesn’t mean I should increase it to 50% either. I think the key to success is diversification, including having both domestic and international investments.
* This means that our wealth is affected by the global economy. As such, we should be aware of what’s going on outside of the U.S. and looks for way to grow our wealth more at a global level.
Please let me know what you think about this different perspective on wealth by leaving a comment. Thank you.
Updated December 20, 2011 and originally published October 4, 2007.