The Real Effects of Inflation on Your Investments

 

What are the real effects of inflation? Above is a graph that shows the growth of the Dow Jones Industrial Average from 1913 to 2002 – quite a stretch. It’s an amazing 2.738% after you adjust for inflation (which ran 4.240% over the same time frame). So, investing in the stock market gave you a real return of 2.7%. Exciting isn’t it?

No? Well, over the same period of time, real estate returned 0.635% after inflation so just be glad you didn’t invest in real estate.

Don’t Look At Just the ROI of Your Investments

Most people just look at the interest rate they are being paid on their investments. Don’t be one of those investors. Here’s why: if inflation is 4% and you are earning 3%, you are really losing 1% of your wealth. That’s happening right now to a lot of people.

It’s not a new phenomenon though. In the 1970′s, investors were ecstatic about their negative rate of return. At that time, inflation rose from 3.25% to  11%. In 1980, it topped 13%. Meanwhile investors thought they were laughing all the way to the bank because CD rates were paying 12.94%.

The Solution

There’s a simple solution to this problem: pay attention to both inflation and rate of return. That’s it.

Some Ideas

Want some ideas for keeping your head above water? OK, here goes:

• High cash value life insurance (must be designed for cash accumulation and not maximum death benefit)
• Inflation-adjusted bonds
• Equity-indexed annuities (the simpler the design, the better)
• Equity-indexed bank CDs
• High quality dividend stocks (think Aristocrats)

What about you? How do you cope with inflation?

_________________________
February 5th, 2013 | by David | No Comments