Investments involve many different kinds of risk, one of which is inflation. And that is particularly topical today, when the prospect of inflation looms large.
Inflation risk is the risk that the money earned on an investment won’t keep up with the rate of inflation. It hurts investors who are uncomfortable with volatility and decide to invest solely in Treasury bills, certificates of deposit and savings accounts.
Believe it or not, one of the riskiest things you can do with your money is not invest. Letting your money sit in a bank or in a money market account can chip away at your savings.
Let’s say when you were 45 years old you started investing $400 a month for retirement. You were convinced the market was going to tumble, so your money earned 5% a year in a low-risk investment vehicle. Today, 25 years later, you’re on the doorstep of retirement, and you have around $235,000. Will it last another 20 years or so? After 25 years, $235,000 is equivalent to around $112,000 (assuming annual inflation of 3%). That may not be enough for you to live on for 20 more years or so.
On the other hand, if you had invested that $400 a month in equities, your return could have been significantly higher. Of course, returns are not guaranteed when you invest in equities.
Please don’t hesitate to call or email us if you want to better understand how to protect your portfolio against inflation. We’re here for you.