This week’s takeaway: This week, I’m adding “This week’s takeaway” at the end of each week’s blog post. It may be a summary of the post or just a concept I want to highlight. Look for it and email me to let me know if you find this helpful.
This week’s blog post:
Change can happen gradually. You may not even notice very small changes. But over time, small changes accumulate to have a significant impact.
You may or may not really notice as prices go up gradually over time. The cost of your favorite cereal, yogurt, bananas, as well as utilities, health care and other services may go up over months and years.
This price inflation is when the cost of goods and services increase over time. In general, the cost of most items increase. In the short-term, price increases usually do not change your purchasing habits or your standard of living.
However, over the long-term, say decades, year to year price increases (inflation) have a major impact. If you do not have substantial retirement income or savings, and your income and assets do not rise as costs rise, how will you live the life you want to live?
To give you a better idea of the true, long-term impact of inflation, let’s look at the cost of cereal over many decades. An 18 ounce box of Kellogg’s Corn Flakes increased from 27 cents in 1960 to $4.19 in 2017.**
Here is a summary of the cost of an 18 oz box of Kellogg’s Corn Flakes over the past 50+ years:**
It’s pretty startling. As this chart shows, the dramatic increase in Corn Flakes prices over the decades is really quite significant. You know the cost of groceries have gone up over time, but seeing it like this probably provides you with a different perspective. It sure surprised me.
How does long term price inflation impact your investments? It’s pretty startling. As this chart shows, the dramatic increase in Corn Flakes prices over the decades is really quite significant. You know the cost of groceries have gone up over time, but seeing it like this probably provides you with a different perspective. It sure surprised me.
To maintain your standard of living and keep up with inflation, we generally recommend that most clients have an allocation to a diversified portfolio of stocks. Over time, stocks and their rising dividends exceed the rate of inflation. Fixed income investments do not keep up with the inflationary effect of rising prices, especially on an after-tax basis. The purpose of the fixed income allocation of your portfolio is to provide you with current income and stability, as this part of your investments will not incur the fluctuation of stocks.
Thus, owning stocks, even with their short term temporary ups and downs, gives you the best chance of out-pacing inflation over the long term. The percentage of stocks in your portfolio would be based on your personal situation, your timeframe and what you want to accomplish in your lifetime.
If you are now 60, your life expectancy is hopefully many decades (20-30+ years), so your investment portfolio needs to be able to provide for growth to keep up with, and exceed, the gradual rise in prices over time. This after-tax, real long-term growth has to come from stocks, for which we recommend a globally diversified stock portfolio.
You want safety and financial security. That comes from fixed income. But you need to have growth to outpace inflation and build your wealth (especially for younger clients), which you get from holding stocks for the long-term.
For many people, there is a tightrope balance of what percentage of stocks and fixed income that need to be held at various stages over your lifetime. We help you determine an appropriate allocation of stocks because it is necessary for your long term financial future. And then we help you maintain this stock allocation, especially when stocks go down. As your financial advisor, these are vital aspects of the value we provide to you.
This week’s takeaway: Owning a globally diversified portfolio of stocks will outpace inflation over the long-term, if you don’t sell when stocks go down. If you remember that broad based stock declines have always been temporary, you will be a more successful long-term investor.
**Source: foodtimeline.org, 8/20/2017, for data through 2000. Data for 2017 based on local store, 08/20/2017.