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A 'Back to Basics' Approach to Long-Term Inflation Risks

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Planning ahead for your financial future isn't all about managing an investment portfolio. Costs for everything from prescription drugs, home insurance, pet care and real estate taxes have shot up between 95% and 184% since 2000, finds a recent Senior Citizens League study.  

It's true that over extended periods, investing in stocks has proven an effective way to battle the ravages of inflation. (See graph below.)

Growth of Dollar

But at times, even a blue chip portfolio can run into headwinds fighting inflation. For example, during the 17-year period from 1966–1982, the return of the S&P 500 Index was 6.8% before inflation. But after adjusting for inflation that gain was cut to zero.

And many long-time investors will probably remember the "lost decade" from 2000-2009. In this period, the return of the S&P 500 Index dropped from –0.9% before inflation to –3.4% after inflation.

Some investors try to time such bouts of inflation by using a range of alternative trading strategies, from commodities to hedge funds and private-equity. We've researched such "liquid alts" and discovered plenty of holes in both concept and design.

Rather than trying to get too exotic and invite more risk-taking in your portfolio, IFA urges you to take a more practical and holistic approach to countering inflation. Simply put, this comes down to focusing on diversifying across market dimensions that a wealth of academic research shows are key drivers to long-term gains in passively managed and globally diversified investment portfolios.  

Granted, effective execution of such a 'back-to-basics' approach to building wealth can take more of your time. 

But we can help with a range of different sophisticated planning tools. You should also feel free to start an ongoing conversation with your IFA wealth advisor about creating a comprehensive and individually tailored financial plan. It's a service we offer to all of our clients at no extra charge