Nancy Graham April 20, 2017 Personal Wealth How Do You “Inflation-Proof” Your Investments? When I was growing up on my family’s Manitoba farm, believe me, we knew what a dollar was worth. When I was a little kid a pop and chips would set me back a whole quarter! Later on filling the tank of my shiny blue Buick was a hefty 15 bucks. As you probably know, thanks to inflation, you’re going to need a lot more than that to get around town today. I did the math, and that tank of gas would now set me back $91. But what is inflation, exactly … and what’s it to you? These are definitely NOT dumb questions. Most people who aren’t economists or married to economists haven’t got the definition quite right, especially as it applies to investing and retirement planning. What does inflation mean to you as an investor? It doesn’t take long to notice a dollar doesn’t buy as much as it used to. What will a buck buy you these days? That’s what inflation measures, and it’s not always all that pretty to see it in action. “ In fact, inflation can be downright annoying. But it also serves an important purpose. It also measures the “temperature” at which the economy can simmer along nicely. If inflation gets too high and boils over, everything starts getting hyper-expensive. If it’s too low and tepid – known as deflation – business can stagnate and economies slump. That’s why the Bank of Canada and our Canadian federal government try to keep inflation at a just-right balance. The Consumer Price Index, or CPI, is usually the thermometer, with the ideal inflation rate – as identified by the Bank of Canada – hovering around 2 percent. At around that rate, consumers, businesses, borrowers and lenders — the economy — can keep cooking along. But what about the money you’ve set aside for saving instead of spending? Inflation immediately starts munching away at these dollars, reducing buying power … which is why you can – and should – take control over the impact of inflation on your carefully saved reserves. What sort of damage is done? As this chart shows, if you set aside $1,000 today and inflation is at 2%, that same, cool grand is expected to only buy $820 worth of milk or haircuts or home renovations a decade from now. This can become especially harmful once you’re in retirement, with less earning power To make sure your $1,000 nest egg will retain its spending power, you need it to grow at or beyond the rate of inflation … or 2% or more in this illustration. So how do you go about inflation-proofing your savings? Over time, the stock market is expected to handily outperform inflation! That means you’ll want to invest some of your savings in the market. If you instead keep it all in cash or cash equivalents, you’re essentially guaranteed to lose out to inflation. But here’s where I see another big misunderstanding getting in the way. The goal is to beat inflation by investing in the stock market. I often see investors trying to beat the markets instead. Reams of academic evidence tell us: To earn a market’s expected returns, net of fees, all you have to do is be there, investing over the long haul and keeping your costs to a minimum. Those who instead stretch too hard for market-beating returns usually spend more money trying to do this, with less to show for it. So yes, to beat inflation, invest some of your savings in the market. But to beat inflation does not mean that you need to beat the market. You just need to prudently be in it. Fortunately, there is a great, cost-effective way to earn inflation-busting returns without breaking into a sweat to do it. How does that work? Why, what a great “No Dumb Question” to talk about in a future video. Share: Facebook Twitter LinkedIn Email CIRO Advisor Report
Behavioural Finance Nancy Graham A Trick Question: What Should You Do During Volatile Markets? Jan 16, 2019 Behavioural Finance