Effects of Inflation

If you have long term savings goals such as saving for your children’s college education, or retirement, you’ll want to read today’s blog on the effects of inflation.

To put it simply, inflation is the increase of the price of products over time. The rate of inflation fluctuates over time, sometimes it can run high, other times, it’s so low we don’t notice. But all these fluctuations are generally short term, what we need to focus on is the long term.

Over the years, inflation can chew away at the purchasing power of your income and wealth. This means that even as you save and invest, your wealth buys less and less as time goes on. Those who put off investing and saving will feel this impact even more.

While one cannot deny the effects of inflation, there are ways to fight them. For starters, you should own at least some investments whose potential return is greater than the inflation rate. For example, if a portfolio earns 3% when inflation is at 4% the investment will lose purchasing power over time. While past performance isn’t an indicator of future results, stocks have provided higher long term returns than cash alternatives or bonds. Still, one has to be aware that even with that potential, there is greater risk and potential for loss. Because of this volatility stocks may not be the best option for the money you count on being available in the short term. You will also have to think about whether you have the financial and emotional capacity to ride out these ups and downs as you pursue higher returns.

Diversifying your portfolio — spending your assets across a variety of investments that may respond differently to market conditions — is one way to help manage inflation risk. However, diversification does not guarantee a profit or protect against a loss; it is a method used to help manage investment risk.

Remember, all investing involves risk, including the potential loss of principal. There is no guarantee that any investment will be worth what you paid for when you sell.

For more information about the effects of inflation, or for more strategies to fight against it click here, or call Federal National Funding today at 201-342-3300. One of our associates will be happy to speak to you.