The hidden peril of inflation
Most people think a market crash is the biggest danger to investors.
Finally, let's say the market takes a 30 percent dive over the
next year. Every time you check your stocks or stock mutual funds,
you're going to feel the pain. Likewise, if interest rates rise,
your bonds won't let you forget it. But nowhere on your bank or
brokerage statement -- or anywhere else, for that matter -- are
you likely to get a report on what inflation is doing to the real
value of your holdings. So if your money is stowed in a "safe"
investment, like a low-yielding savings or money market account,
you'll never see how inflation is gobbling up virtually all of
your return. Here are some points to bear in mind:
That's why, whenever you add up your gains or losses for a given
period of time, you have to add in the effects of inflation to
understand how much further ahead or behind you really are.
- At an average annual growth rate of 11.4 percent a year, stocks will
double your money about every six years. Factor in
inflation, which has historically run at about 3.1 percent annually, and
it will take closer to ten years to double your actual buying power.
- Likewise, bonds, which have historically grown at 5.1 percent
annually, will double your money every 13 1/2 years. After inflation,
however, it will take 35 years.
- And talk about risk, if your money is in cash (which is how money
market accounts are known in the investment world), you'll have to
wait 19 years for the nominal value of your account to double, assuming
the cash earns the historical 3.7 percent annual return. But even
your grandchildren won't see the real value of your money double. The
reason? After inflation, it will take 139 years.
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