Inflation is defined as the increase in the price of products over time. Inflation rates have historically fluctuated over the years. Sometimes inflation runs high, and other times it is hardly noticeable. The short-term changes aren’t the real issue. The real issue is the effects of long-term inflation.
Over the long term, inflation erodes the purchasing power of your income and wealth. That means that even as you save and invest, your accumulated wealth buys less and less, just with the mere passage of time. Additionally, those who put off saving and investing will find themselves in an even deeper hole.
What Can You Do About Inflation?
If you look back through history you will notice that there are two asset classes that consistently outperformed inflation over the long hall. Those asset classes happen to be stocks and real estate.
Stocks can be extremely volatile during times of high inflation, driving investors to search for less volatile and more stable alternatives. However, stocks tend to be a great hedge against long-term inflation.
Real estate can be a great hedge against inflation but it can come with liquidity concerns. Investors that don’t have the capital to purchase direct real estate have an alternative in real estate funds; otherwise know as REITs. REITs, like stocks, tend to be very volatile during periods of high inflation.
Do You Have a Plan?
Another lesson you can learn from history is that you will need to double your income every 20 years to keep pace with inflation. Do you have a plan for that? How are you planning to double your income every 20 years during your retirement?
Stay tuned in the coming weeks as we will be discussing strategies to overcome inflation.