Are your investments keeping pace with inflation?

Published 12:00 am Saturday, June 5, 2004

Insurance Insights – MIKE WILLIAMS

Anyone who makes a significant purchase will tell you a dollar doesn’t go as far as it once did. Because of inflation, the rate at which prices rise, you need $10 to buy something today, that cost $1 in 1925. Inflation is something to be aware of, and that is also true when you consider savings and investments.

Over the last 75 years, the annual inflation rate has averaged 3.1 percent. Money that does not draw interest “shrinks” in valaue and buying power as time passes. For your savings or investments to keep pace, or gain on inflation, you need to realize an annual return of more than 3.1 percent on average, assuming the past inflation trending continues.

Historically, stocks have produced returns greater than the rate of inflation. Since World War II, overall, stocks have averaged a return in the 8-11 percent range. That’s significantly higher than returns from bonds and Treasury Bills in the range of 3.8-5.3 percent. Of course, bonds and T-bills are less risky than stocks and some prefer that. Generally, greater risk for loss or fluctuation, also translates into the greater potential for gain. That is something that each investor must decide for himself.

One way for the average investor to “hedge” against inflation is through investing in mutual funds. These funds are managed by professionals, and are diversified in make up. Some are more targeted toward certain sectors of the market, while others are more broad based to mirror the performance of the market in general.

The recent highs of the market (late 1990s) were replaced by troubling lows, and then a recovery. What’s the lesson? The market has risk, and goes through cycles. However, when considering long-term performance, stocks and mutual funds have historically posted gains over periods of time.

Your investment strategies should be carefully considered, based on what your needs and goals are. The market may not be the best strategy if you expect to need that money in one, two or three years. However, that strategy may be different if you are willing to invest for long periods of time – say 15, 20, 25 years or more. The conventional wisdom seems to hold true about investing – diversify, make informed decisions and be patient.

Of course, there is no guarantee that the markets will continue to rise. Past performance does not guarantee future results. Investment return and principal value will fluctuate, and when redeemed could be worth more or less than the original cost. Securities are not bank products and are not FDIC-insured. Become informed about your investment options. Plan for the future wisely.

MIKE WILLIAMS is a State Farm representative.