Over the past several months, nearly every conversation I’ve had with clients eventually circles back to the same topic: inflation.
You see it at the grocery store. You feel it when paying your rent or mortgage… and now at the gas pump.
Over roughly the last five years, prices across the economy have risen dramatically. Many estimates place the increase somewhere around 20% to 25% and in our opinion is due primarily to the Federal Reserve “printing dollars” so that more dollars are chasing the same amount of goods which pushes prices up.
When inflation rises this way, it creates an important question for anyone trying to manage their finances responsibly:
Is Your Investment Portfolio Positioned to Grow Faster Than Inflation?
This is where thoughtful financial planning becomes essential.
First, let’s start with something very important that sometimes gets misunderstood. Every household should have a portion of their money set aside in safe, stable assets. Cash reserves and high-quality bonds play an important role in a well-structured financial plan. They provide stability. They create liquidity. And they offer peace of mind when markets are volatile and are the source of funds to pay bills during the short term. These assets are the “Safety Net”.
Stocks and real estate have exhibited returns greater than inflation over the long term and are considered excellent “inflation hedges”.
In contrast, cash and bonds are not inflation hedges. If inflation averages even 2% per year, which historically has been considered relatively modest, over ten years the purchasing power of your money declines significantly. In practical terms, the dollars sitting in a savings account today could be worth about 20% less in purchasing power a decade from now.
Stocks’ returns have been approximately 4 percentage points greater than inflation over the long term. When you own shares in strong companies, you are essentially owning a small piece of a business. Well-run businesses adapt. They adjust prices, improve efficiencies, and expand into new markets. Over time, many companies grow their revenues and profits in ways that reflect broader economic conditions, including inflation. This is why stocks have historically been one of the most powerful long-term tools for maintaining and growing purchasing power.
Real estate is another asset class that tends to adjust with inflation. As the cost of construction materials, labor, and land increases, property values often rise as well. Rental income can also increase over time, which allows property owners to keep pace with rising costs in the broader economy.
This is why a balanced strategy matters. While we recommend a safety net, we also recommend that investors invest for the long term with stocks and real estate.
The real key, however, is not choosing just one of these strategies; it’s creating balance among them; so you benefit from both security and the long term prospects of the stock and real estate markets.
Inflation cycles will come and go. They always have.
Watch a short video on the subject here.
Rich Lawrence, CFA
Disclosure: Lawrence Wealth Management LLC and Richard Lawrence make no guarantees, warranties, or predictions. Investors can lose money investing in capital markets.