The Real Cost Of Inflation: How Investors Are Quietly Losing Wealth

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Michael Brocker, MSFS,CLU,ChFC,AEP®,AIF®

Financial Advisor and CEO
Legacy Wealth
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Matthew Brocker, MSFS,AEP®,RICP®,CAP®,AIF®

Financial Advisor
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Joshua Brocker, CFP, AIF®

Financial Advisor and Planning Strategist
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Benjamin Brocker, CFA

Investment Strategist
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John Brocker

Inflation is now a major concern in the financial environment of today. It controls headlines and affects the economy at every level. Although the most obvious sign is increasing prices, the wider consequences of inflation go far further. More than most people would know, inflation is silently eating away at investment profits, therefore reducing buying power.


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Like in past inflationary times, many see inflation as a passing obstacle, yet the reality is more complicated. For example, the repercussions of the inflation surge in the United States to above 9% in 2022 will have long-term implications for investments and savings that go much beyond initial projections. With several asset classes struggling to keep pace with growing expenses, real returns, adjusted for inflation, have underperformed. Many believed that a temporary economic difficulty would pass, yet it turns out that this is a long-standing problem silently influencing portfolios and long-term wealth in usually disregarded ways.

Knowing this is vital since inflation still poses a sneakier danger to wealth than the obvious one and calls for a smarter investing approach.

Inflation’s Impact on Real Returns

Before considering inflation, nominal returns—that is, the percentage increase on an investment—are real returns. However, it is correct for inflation to represent the actual rise in buying power. For example, the actual return is only 2% if an investment pays a nominal return of 5% while inflation is running at 3%. Silent inflation lowers the actual worth of investment increases, limiting actual wealth creation.

Throughout the 1970s, high inflation caused actual returns to be negative, even when nominal returns on assets like stocks and bonds were favorable. The inflationary climate of today presents comparable difficulties. For instance, after correcting for inflation exceeding 7%, a tech stock that earned 8% in 2022 may only have a true return of 1%. Furthermore, during times of high inflation, bonds and savings accounts with lower nominal yields can show negative real returns.

Many times, focused on nominal gains, retail investors overlook the erosive consequences of inflation. Over time, even apparently rising investments might lose buying value. Savings accounts with a 1% interest rate, for instance, suffer actual losses when inflation is 3% or more, therefore producing negative real returns even with the positive nominal figure. The protection of long-term wealth depends on an awareness of inflation-adjusted performance since then.

The Hidden Costs of Inflation on Savings

Even in interest-bearing accounts like high-yield savings or CDs, inflation quietly reduces the purchasing value of assets. Though these stories might show interest rates, they usually fall short of outpacing inflation. For instance, the real worth of your money would drop 1% annually if you had $10,000 in a savings account earning 2% annually while inflation averaged 3%.

Imagine a situation where, for over ten years, inflation has stayed constant at 3%. After inflation, the real worth of your money would drop by over 17% in your savings account at an annual interest rate of 1.5%. Therefore, even if the nominal value increases somewhat, the real buying power of your funds reduces. Over time, even modest inflation of 2–3% can seriously deplete savings. Over five to 10 years, a $50,000 savings amount could lose thousands of actual values. In an economy with 3% inflation, for instance, $50,000 with a 2% annual interest rate would have a buying power loss of about $6,000 in just five years. These little losses aggregate to cause a slow but notable wealth decline.

Savers who want to implement plans that preserve their purchasing power and guarantee their savings increase in real terms rather than merely nominally must first understand these processes.

Psychological Impact on Investors

Many investors believe bonds and savings accounts to be "safe" havens, therefore generating a false sense of security. This view results from ideas in behavioral finance such as nominal bias, in which investors concentrate on nominal gains without considering inflation. They so underplay the long-term consequences of inflation on their wealth.

Also aggravating wealth disparity is inflation. Those depending on fixed-income investments—that is, seniors or lower-income people—see their buying power gradually declining. Richer investors who own inflation-hedged assets, such as real estate and stocks, can more effectively protect and increase their wealth. As inflation gradually devalues more cautious, "safe" investments, this gap is more pronounced.

Understanding this psychological trap is essential to developing plans that really fight inflation and make sure investment decisions are based on actual value instead of apparent protection.

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WASHINGTON, DC - JUNE 22: Jerome Powell, Chairman, Board of Governors of the Federal Reserve System testifies before the Senate Banking, Housing, and Urban Affairs Committee on June 22, 2022 in Washington, DC. Powell testified on the Semiannual Monetary Policy Report to Congress during the hearing. (Photo by Win McNamee/Getty Images)

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The Dilemma for Fixed-Income Investors

Retirees and pension holders, among other fixed-income investors, have difficulties during inflationary times. Bond yields usually rise as inflation rises, which reduces bond prices and hence erodes the value of current bonds. For people depending on fixed-income assets for stability, this dynamic, combined with the effect of inflation on pensions and annuities, greatly diminishes actual income and purchasing power.

By changing their value depending on the Consumer Price Index, Treasury Inflation-Protected Securities (TIPS) provide defense against inflation. But TIPS carry certain hazards of their own. Particularly with longer maturities, they can be quite sensitive to interest rate changes and offer reduced real returns amid low inflation, which causes price volatility.

Though they offer some degree of inflation protection, TIPS might not always be the ideal choice for those looking for both security and expansion. Among the trade-offs are reduced returns and less sensitivity to fluctuations in interest rates. Many investors find a more complete method for protecting wealth during inflationary periods in a more balanced approach, including other inflation-resistant assets, such as stocks or real estate.

Actionable Steps to Protect Wealth

Reevaluating conventional savings and investing plans is vital while inflation continues. Inflation is a persistent issue requiring careful, long-term preparation rather than a passing flutter. Ignoring its influence could cause riches to gradually erode rather dramatically.

Think about spreading your portfolio to help guard against inflation. Rising prices can be lessened by real assets such as real estate and commodities, inflation-resistant investments including TIPS, and dividend-paying equities. Keeping a balanced portfolio with these components can help provide stability and expansion, even in an inflationary setting.

Although inflation creates challenges, smart, proactive investors can nevertheless safeguard and increase their money. Staying alert and using a strategic strategy will help you negotiate these difficulties and protect your financial future.

By Jim Osman, Senior Contributor

© 2024 Forbes Media LLC. All Rights Reserved

This Forbes article was legally licensed through AdvisorStream.

Michael Brocker profile photo

Michael Brocker, MSFS,CLU,ChFC,AEP®,AIF®

Financial Advisor and CEO
Legacy Wealth
Matthew Brocker profile photo

Matthew Brocker, MSFS,AEP®,RICP®,CAP®,AIF®

Financial Advisor
Joshua Brocker profile photo

Joshua Brocker, CFP, AIF®

Financial Advisor and Planning Strategist
Benjamin Brocker profile photo

Benjamin Brocker, CFA

Investment Strategist
John Brocker profile photo

John Brocker