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Inflation Risk Means Investors Need to Think Long Term

Jul 21, 2014

Looking at historical rates of inflation increases, one can scour the data and find 4% as the approximate number for the annual rate of increases. If you do the math over 30 years, what someone pays $1 for this year will cost you nearly $3.25 over the course of the next three decades. So it’s easy to understand that one’s nest egg that sits in cash will eventually evaporate much quicker than an individual realizes.

Investing for growth and seeking returns of 8%-10% a year may sound ambitious, but it will keep investors easily ahead of the curve. Let’s look at an example:

The Best Approach

The Fidelity Blue Chip Growth K (FBGKX) has been a stellar name for mutual fund investors to own in the Large Cap Growth category – $10K invested in the fund 10 years ago, would now be worth $25K. This is an outstanding return, but it can be done.

The concern for mutual fund investors is keeping stock exposure a bit too high as retirement years get close. When you think about people living longer, the threat of running out of money is a stark reality, especially for those who neglect to invest in their early years.

The best approach for any mutual fund investor is to dedicate a specific amount of one’s earnings into a 401K plan and a brokerage account to maintain a steady capital injection into these accounts. Avoid timing the market and understand that most stock market years tend to be positive. The tough cycles will undoubtedly come, and one can easily allocate a bit less if there is a sense of fear in keeping too much in stocks at an older age.

The Bottom Line

In the end, staying the course and investing a bit longer in stocks than one would expect will probably keep investors ahead of the curve where inflation is concerned.