A few years ago, on the heels of the financial crisis of 2008-2009, I had the pleasure of attending a conference where renowned financial author, Nick Murray, was speaking. I still remember the core of his message: he was concerned that, due to the scars of the huge stock market meltdown, many investors were going to become solely focused on safety of principal and, in doing so, completely and regrettably forget about the risk of inflation. In short, he was witnessing people, in the interest of feeling better temporarily, moving all of their money into 1, 2 or 3% CDs (or even burying it in the backyard) and vowing never to go back into the markets again—all the while forgetting that if inflation went back up to 3-4% (as we know it historically often does), their real return would then become negative.
So, while we have been in an unprecedented period of very tame inflation, we always want to make sure that our clients understand the risk that comes with over-allocating to so-called “no risk” assets. Of course, there is no substitute for secured deposits for funds that are going to be needed for near-term and sometimes even mid-term expenses. But for longer-term funds, a well-designed investment portfolio will go a long way to offset the erosion of purchasing power that inflation can cause. And with life expectancies on the rise, the need to at least keep up with inflation becomes an even more important factor to consider as we do our planning.
Up next: Timing risk