Investing in stocks can be a risky endeavor – especially if you’re worried about volatility. The real risk, however, in a retirement portfolio is the silent killer called inflation.Learn more about inflation and retirement planning: https://youtu.be/sDnGs3_5ihI
Today I want to share with you some key considerations regarding risk and the impact of inflation. Sure, stocks have their share of good years and bad, and that volatility can be a very difficult thing to bear but what can really harm a portfolio over time is the erosion of purchasing power due to inflation.
Let’s assume we have an un-invested cash balance of $100,000 and inflation runs at 3% annually. After only five years, that cash balance is now worth only $85,873. And after 20 years, that $100,000 is just $54,379. In other words, it has lost nearly half of its original value. Every investor must consider that if their portfolio is invested too conservatively it may not produce enough return to outpace inflation.
We live in an era now where the 10 year Treasury note is yielding near historic lows. This has forced many investors to take on additional risk vis-à-vis stocks to achieve returns similar to the 1980s and 1990s. Consider if your portfolio of fixed income (or bonds) produces a return of 4% annually, inflation may cut that return down to just a 2% real return. For the long-term investor, your best hedge against the negative impact of inflation is to have a reasonable exposure to stocks that fits your risk tolerance.
For more tips, or if you have any questions about the benefits of working with Hills Bank Trust and Wealth Management on your retirement plan, feel free to leave them in the comments below or visit us at HillsBank.com/WealthManagement.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank, and may go down in value.