Individual Stocks

Inflation and the Consumer Price Index

Why is price inflation so harmful to my retirement investments?

Inflation is harmful to your retirement investments for a variety of reasons. Since 1926, even with periodic market crashes and movements in the equity markets, the average return on one’s investments have been approximately 11%. The inflation rate has increased by approximately 3.1% in the same time period. It is generally thought that we need to earn more on our investments than the inflation rate, since when we figure our real rate of return, we must subtract the rate of inflation from whatever return we are getting on our current investment portfolio. So if we are getting a 4% return on our investments, it is really a 0.9% return before taxes (after adjusting for inflation). This erosive effect is the main reason why we actively need to seek good investments that provide good returns on our principal.



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