• Skip to main content
  • Skip to footer

Mountain Vista Wealth Management

Guiding from Valley to Peak

  • Home
  • About
  • Blog
  • Client
    • TD Ameritrade
    • Orion Advisor
    • RightCapital
  • Contact
  • Start Here

May 24, 2018 By Jon Heagle

The Scourge of Inflation

Investing can be confusing and even scary to the average saver, but while staying in cash may give you a sense of security in the short term, one is almost guaranteed to lose purchasing power over time. This is because of inflation, defined as a general increase in prices and the fall in the purchasing value of money.

Mainstream economists currently believe that financial system performs best with low, but positive inflation, as judged by the promotion of employment and economic growth.  The Federal Reserve has long targeted price stability, but as of 2012, they officially announced a target of  2% inflation over the longer term.

Just as inflation is viewed as beneficial to the economy, deflation, or a drop in prices, is believed to be detrimental.  Consumers put off buying goods that they believe will be cheaper in the future and business investment slows as companies experience less demand and find it more difficult to generate a positive return on capital.  Finally, borrowed money becomes more difficult to service and payback.  For these reasons, inflation is likely to remain positive in the future.

To illustrate the importance of inflation over time, consider that a good costing $100 in 1968, would cost $720 in 2018, if indexed to the Consumer Price Index. That is a cumulative inflation rate of 620%!

As you can see in the chart, inflation has recently been in the low single digits and the 20-year average is just over 2%, but looking back to 1913, the annual CPI has been greater than 10% 10% of the time and greater than 5% 24% of the time. An individual who simply “put cash under the mattress” would have seen a dramatic drop in their wealth during these periods.

Why should an investor care about inflation?  Because it determines how much of their returns are an actual growth in purchasing power. Successful investing focuses on positive real, or inflation adjusted, returns.  The nominal returns earned on your investments can be broken down into the real return plus inflation.

Rnominal = Rreal + Rinflation

If your investments are not earning the rate of inflation, your real return is negative, and the purchasing power of your money has been eroded. If your return is equal to the rate of inflation, you have simply maintained the purchasing power of your money.

The silver lining is that history tells us a balanced portfolio that incorporates equities and fixed income, should not only keep up with inflation over time, but have a positive real return (Rnominal > Rinflation). According to Vanguard, a 60/40 portfolio of equities and fixed income returned 8.8% annually between 1926 and 2017. During this period, the average annual CPI was approximately 3%, leaving you with a real return of approximately 5.8%. While the past does not guarantee future performance, particularly over short periods of time, the case for investing is clear when the alternative is a likely loss of purchasing power.

Filed Under: Investing

The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Mountain Vista Wealth Management, LLC (referred to as “Mountain Vista”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement and suitability for a particular purpose. Mountain Vista does not warrant that the information will be free from error. None of the information provided on this website is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall Mountain Vista be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials in this site, even if Mountain Vista or a Mountain Vista authorized representative has been advised of the possibility of such damages. In no event shall Mountain Vista Wealth Management, LLC have any liability to you for damages, losses and causes of action for accessing this site. Information on this website should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.

Reader Interactions

Trackbacks

  1. Tune out the noise says:
    August 29, 2018 at 5:28 pm

    […] Also, check out my article on the importance of investing to beat inflation. […]

Footer

Contact

CALIFORNIA
Mountain Vista Wealth Management
555 Mountain Drive
Santa Barbara, CA 93103
(805) 225-6559
jon@mountainvistawealth.com
CONNECTICUT
Mountain Vista Wealth Management
4 Prospect Street
Ridgefield, CT 06877
(646) 779-5552
michael@mountainvistawealth.com
  • Email
  • Facebook
  • Twitter

ADV 2A & 2B (Firm Brochure) | Privacy Policy

Mountain Vista Wealth Management, LLC (“Mountain Vista”) is a registered investment advisor offering advisory services in the States of California, Connecticut and New York and in other jurisdictions where exempted.  Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Mountain Vista in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of Mountain Vista, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

 

  • Home
  • About
  • Blog
  • Client
  • Contact
  • Start Here

Copyright © 2023 · Mountain Vista Wealth Management · Built with Attitude by Smarty Pants Media Solutions