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How Will Inflation Affect My Investments?

How Will Inflation Affect My Investments?

November 23, 2021

It’s been a long time since we had “serious” inflation. More than 30 years. In the 1990s we averaged about 2.9% inflation, in the 2000s we had averaged about 2.5% inflation and in the 2010s the average was about 1.8%. So, it’s no surprise we may have forgotten a few details.

This year, we have seen inflation touch 5%. And it has lots of folks talking.

Some of the talk is about the vicious wage-price spiral we all struggled with in the 1970s. At that time, prices were rising on goods and wages rose sharply to match. I remember a money market savings account I had at my local bank, back in the day, that paid 14% interest compounded monthly. So far, the economic experts do NOT see that situation returning.

But we can expect to see more inflation than we have seen for a while. So, what should you expect?

I suggest that you focus on the things you can control:

  • Reduce your spending where you can. This savings can help pay for necessities like auto fuel, heat this winter, and food.
  • Focus on earning more. Do all you can to keep your current job. Where possible look at working some overtime. Get some technical training to qualify for a promotion.
  • Keep your savings invested. Any money that you do not need for an emergency fund should be invested in a diversified basket of investments so that it can grow along with inflation. Cash in your sock drawer or in a savings account at the bank can “evaporate” during times of high inflation -- $1,000 that does not earn interest or grow for a year while inflation raises prices by 5% will buy $50 less at the end of the year.

The following table shows the performance of several asset classes during the 1970s, 1980s, 1990s, 2000s and the 2010s. These performance numbers show the gross return of each investment class without discounting for inflation.

Table 1: Nominal (Gross) Returns by Decade 

Source: Craig Israelsen, Ph.D., faculty member, Utah Valley University.

Below is a different representation of the same data. This chart shows returns AFTER discounting for inflation.

Table 2: Real (Inflation-Adjusted) Returns by Decade

Source: Craig Israelsen

Even after inflation, a diversified mix of various stocks, bonds, real estate and commodities beat inflation and grew the real spending power of your money in each of these decades. Even a “plain vanilla” portfolio of 60% US Large Cap Stocks and 40% US Bonds made money most of the time.

Benefits of a Diversified Portfolio

Source: Craig Israelsen

As you can see, there is reason for optimism going forward. Nobody knows how much inflation we will get. Nobody knows how long it will last. When we finally beat the COVID-19 pandemic, things could return to a more normal baseline.  

We do know that all the economic experts and our government leaders are all thinking about inflation. They are worrying about inflation. And they are trying to do all they can to keep inflation under control. We shall see how it turns out.

You might well still be nervous about your situation. I hope that you have a professional, experienced, well trained financial planner like a CERTIFIED FINANCIAL PLANNER™ professional working with you. If you do, you can work with them to monitor your investments and manage the impact of a rising cost of living.

If you would like to talk with me about inflation-smart investing, follow this LINK to find a time that works for you.

To find a CFP® professional near you, start your search here.

As you visit with financial planners, I suggest a couple things to check:

  • Is the advisor always the client’s advocate – a fiduciary advisor?
  • Is the advisor paid by clients, not financial product manufacturer or distribution network? That would be a fee-first advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

A fiduciary, fee-first, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.