Month: February 2025

Quiz!

What is the effect of 3% inflation over 24 years on your purchasing power?

1. 0% – the purchasing power stays the same.
2. 20% – it increases my purchasing power.
3. -20%
4. -50%
5. -60%

Addressing Inflation: A Risk That Time Can’t Cure!

Most investments have occasional declines, sometimes lasting multiple years. As long as you are reasonably diversified, and don’t depend on a high withdrawal rate from your investments, you are likely to recover from declines and reach new highs over time.

There is one investment risk that doesn’t go away and grows with time – inflation. It is not just a risk – it’s a fact of life that doesn’t go away (with rare typically short-lived exceptions of deflation). To make matters worse, it compounds over time, rivaling the worst investment declines. A few examples:

1. A moderate 3% inflation rate leads to a 50% irreversible decline in your purchasing power, compounded every 24 years.
2. A person retiring in 8/1972 got 8.81% inflation over 10 years, equaling a 57% decline in purchasing power.
3. A person retiring in 2/1966 got 6.38% inflation over 20 years, equaling a 71% decline in purchasing power.

This is especially important for retirees who depend on their savings to support their expenses for as long as they live.

What are examples of investments that are at risk with sustained inflation? Growth (high Price/Book) stocks, CDs (Certificates of Deposit), most bonds, cash.

What are examples of investments that may provide growth beyond sustained inflation? Value stocks, real estate.

While this article suggested tools to handle inflation, there are other risks to investing. They require a well-formed plan that considers your entire picture and specific goals.

Quiz Answer:

What is the effect of 3% inflation over 24 years on your purchasing power?

1. 0% – the purchasing power stays the same.
2. 20% – it increases my purchasing power.
3. -20%
4. -50% [The Correct Answer]
5. -60%

Explanation: When compounding 3% annual increases 24 times, we get slightly over 100%. With products costing twice, it’s the equivalent of losing half of your purchasing power, or: -50%.