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Inflation Bubbles Up
Counter Its Impact with a Long-Term Investment Strategy |
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"If inflation continues, the two-car garage will be replaced by the two-family garage."
-Unknown
While the quote above might be a gross exaggeration, it is founded in a bit of truth. After years of being held in check, inflation has reared its head lately, resulting in pressures not seen since the 1970s. With soaring food and energy prices, inflation—defined as an increase in the general level of prices—has once again become a market buzzword. Why?
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A barrel of oil hit its all time high this Spring—topping the inflation-adjusted high previously set in the 1980s. |
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Gold surpassed $1,000 an ounce for the first time ever in March. |
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Several agricultural prices hit their all-time highs, including rice and corn. |
While general market consensus believes inflation will moderate over the next few months, there is no denying its long-term impact.
Putting a Stamp on Inflation
To help take a simple look at the impact of inflation, consider the price of a U.S. postage stamp over the past 25 plus years.
Source: Vaughns U.S. Postal Rate History Chart
As you can see, the cost of a postage stamp has steadily increased during this time. In fact, it has more than doubled. While the price of a stamp is still very affordable, when similar price increases occur to bigger ticket items—such as homes and automobiles—the impact to your pocketbook is much more significant.
Are Your Dollars Shrinking?
Another way to view the impact of inflation is by taking a look into the future based on a hypothetical 4% inflation rate. As you can see here, $1,000 today may be worth less than $500 in just 20 years. The lesson—you must continue growing your portfolio, even during retirement, to help avoid the eroding effects of inflation—and potentially outliving your assets.
What $1,000 might buy in the future with the hypothetical 4% inflation rate?
Source: The IFID Centre, 2005.
Stay Ahead of Inflation
One way to stay ahead of inflation is by establishing and maintaining a long-term investment plan. One such plan is Dollar Cost Averaging, which is nothing more than the systematic investment of a fixed-dollar amount at regular time intervals.
Dollar Cost Averaging attempts to take the ups and downs of the market and "smooth them out." Instead of trying to time the highs and lows (a daunting task, even for professionals), you're investing the same amount of money at regular intervals. This allows you to "dollar cost average" your share purchases over time—in other words, you purchase more shares when shares prices are low and less shares when prices are high.
Of course, Dollar Cost Averaging does not assure a profit nor guarantee against a loss in a declining market. You should consider your ability to continue purchasing through periods of low price levels.
Talk to Your Financial Advisor
Of course, before starting any long-term investment plan you should always consult your financial advisor. To find out if Dollar Cost Averaging might help you stay ahead of inflation, contact your financial advisor today.
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