Outpacing Inflation
Inflation is the overall rate at which prices for goods and services increase. Over time, the compounding effect of inflation can erode the value of your investments and reduce your purchasing power. To gauge the impact of inflation, simply consider what $100 was worth 20 years ago, compared to what $100 will buy you today.
Even with an average inflation rate of approximately 3.0% – a rate considered modest by most economists – the value of your money will be cut in half in approximately 15 years.
When investing for longer-term goals, such as retirement or a child’s college education, you must factor the impact of inflation into your plan. History has demonstrated that lower-risk, lower-return investments barely have kept pace with inflation. On the other hand, higher-risk, higher-return investments, such as stocks, have significantly surpassed the inflation rate, extending the purchasing power of your portfolio. (see chart)
