Remember when a stamp was a nickel or you could buy a candy bar for a dime? We do. At a relatively low inflation rate of 4%, it only takes 18 years for your wealth and its buying power to be cut in half. One of the primary goals of your portfolio should be to stay well ahead of inflation.
Inflation can suck the lifeblood out of your portfolio.
Many investors are looking to avoid the volatility of stocks. They see this equity risk as too much to bear. The uncertainty of the economy brought on by the child-like antics going on in Washington DC. The struggles of the Eurozone to pay off their ever mounting debt has investors concerned about the future. There is nothing but bad news in the financial media. Nothing leads investors to a place of optimism.
All these concerns lead investors to seek out ‘safe’ investments. Investments such as CDs, annuities, cash, treasury bills or even bonds are sought because there is no apparent volatility. What investors don’t realize is that these ‘safe’ investments have risks of their own.
This risk is even more dangerous than equity risk to your long term wealth.
Regardless of your investments there is risk involved. In the case of equity risk we see the effects every time we look at our statement or watch the daily news. We know that when the markets are down our account balances are down. This risk is visible and unwavering.
With regard to inflation risk we cannot see it daily, weekly or monthly. Unless we are paying attention to our rising food bill or utility bill or when we fiil our vehicle with fuel. These risks are losses in our purchasing power.
Remember with a small 4% inflation rate, in 18 years our cost of living will double.
Although we are in ‘safe’ investments and our account balances only show positive gains we are losing value every day, month, and year.
The trade-off between equity risk and inflation risk will always be there. If we view our portfolio including stocks on a long term basis we will stay well ahead of inflation. The end result is building our wealth for a secure future and retirement.
To succeed in reaching these goals we must:
- Own equities and high quality short term fixed income.
- Globally Diversify.
With the help of an investor coach we can stay focused on our long term goals. We will avoid the emotional panic selling during down markets. We will also avoid emotional euphoric buying of a hot asset class in up markets. We will follow the investment policy statement developed jointly.