The Neglected Investment Risk
Recent stock market volatility, the downside kind, has dominated the financial headlines. As we absorb the opinions of pundits and gurus daily, it's easy to become anxious about our financial well-being and sometimes too focused on short-term stock market declines. As financial advisors, one of our jobs is to thoroughly discuss additional challenges our clients will encounter over their lifetime.
Not often found in the headlines, is the risk of inflation and the impact higher costs will have on the goods and services your lifestyle desires. While most agree that the cost of goods and services rise overtime, do we really worry about inflation like we may over normal stock market volatility? We believe it's critical your investment plan doesn't neglect inflation's potential impact on your financial future.
Ronald Reagan once said, "inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Reagan had a way with words and this bold statement was no exception. Was he right? Below you will find the cost of a few items toward the middle of Reagan's second term, a little more than thirty years ago. If you think about it, most of us begin to start thinking more seriously about retirement about thirty years in advance, and many expect to be in retirement for that long.
|Average new house||$89,500|
|Average monthly rent||$385|
|A First-Class stamp||$0.22|
|A gallon of gas||$0.89|
1986 Remember When — Seek Publishing
What should we take away from this? While a "stable value" savings account or CD may make you feel better when downside stock market volatility appears, it probably won't fully protect your savings from decade's worth of inflation. Prudently participating in the stock market over the long haul helps prevent inflation from devouring too much of the spending power you currently have. Determining your adequate mix between stable value and growth assets is a very thoughtful process that goes beyond this post, but you can read some of our thoughts here and here.
The next time you feel anxious about the stock market dropping, just remember you are in a long-term battle with inflation. By having some of your assets in a well-diversified stock portfolio, you have a better chance to fight that battle over the long-term.
FVIM is an independent, fee-only registered investment advisor. We partner with individuals and families to manage investments and provide ongoing financial guidance relevant to their personal goals and objectives.