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Outpacing InflationBy Roger Sorensen
Just because economic growth is often the cause of inflation, that doesn't mean inflation is a good thing for an economy to experience. Inflation can have a serious negative effect on an investors portfolio if the income and investments growth are not keeping up with the growth of inflation.
Think back to 1977 and remember what a bag of groceries cost. Now think about how much a simple bag of groceries costs today. What do you think it will cost to eat in 2033? Between 1977 and 2005, inflation destroyed nearly two-thirds of a dollar's purchasing power.
The groceries examples makes the point clear: over time, even mild inflation causes serious concern. Another example: At a mild growth rate of merely 4%, a 30-year-old earning $30,000 a year today will have to be earn $118,380 to maintain the same lifestyle as he has today.
For most of us, our compensation tends to keep relatively even with inflation. When today's 30 year old was born his parents were earning about $9,300 a year.
Inflation can hurt you the most when it comes to retirement. If our 30-year-old retires at age 65 and lives in retirement for 20 years, his $118,380 annual income at retirement will need to grow to $249,409 by age 85 - and that's with a mere 4% inflation!
Minimizing The Effects Of Inflation
Start Saving Early: The power of compounding will help accumulate wealth faster than inflation takes it away by reinvesting all dividends and capital gains in additional shares of your mutual funds.
Look For Inflation Beating Investments: Broad stock market indexes such as the S&P 500 and the Dow Jones Industrial Average have outpaced inflation of long periods of time. Realize that past performance does not guarantee future results, however it is a good idea to include stock investments in your portfolio just to help offset the effect of inflation.
Consider Investing In Growth Mutual Funds: These funds look to invest in the stocks of companies tending to be industry leaders with above-average historical growth rates. This offers you the potential to increase the worth of your account over time offsetting inflation.
Diversify: Your portfolio of investments should be spread out to reduce the problem of one or more investments under performing
Copyright Roger Sorensen
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* Sources: For 1977 and 1997 figures: Putnam research, U.S. Bureau of Labor Statistics Retail Food Index, and National Center for Education. The 2017 figures are based on a projected 4% annual inflation rate. Remember, past performance is does not indicative future results. Previous: Diversification | Next: Einstein's Rule Of 72
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