If all this inflation talk has you wondering if you should stuff some cash under the mattress and wait until things calm down, here’s something you should consider.
First of all, you’re not alone. Plenty of investors think about holding more money in cash when the market fluctuates, or they feel the “threat” of inflation. In recent months, inflation has been at its highest since 1982 – and many investors are worried about what that means for their money.
However, it’s important to remember that the point of investing as a whole is to keep pace with inflation if not outpace it.
Let’s say that because of the recent 7% inflation, you decide to hold $100k in cash. Yes, that might make you feel safer…but what you’ve really done is lock in a negative 7% return.
In other words, your $100k is now worth $93k because of inflation.
If you had chosen to keep your money invested, you might have experienced what the financial industry calls “real rate of return.”
According to Investopedia, “Real rate of return is the annual percentage of profit earned on an investment, adjusted for inflation. Therefore, the real rate of return accurately indicates the actual purchasing power of a given amount of money over time.”
For example, if you have a return of 10% on an investment when inflation is averaging 7%, your real rate of return is 3%.
Understanding YOUR Real Rate of Return
When it comes to finances, remember that we all have the impulse to react when the market changes. However, understanding those reactions and keeping a handle on our emotions is an important part of successful financial planning.
This is why working with an impartial professional can be beneficial to your financial plan. Having someone you can contact during times like these to ask questions or get suggestions could make the difference when it comes to your financial future. We’re here to make sure you understand your options and to keep your money from eroding over time.
Denver Private Wealth Management is an independent fee-based financial planning practice with 80+ years of experience in the financial industry. DPWM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at email@example.com.
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