This tale is specifically written for those that are looking for ways of dealing with high inflation with a secondary consideration for dealing with high inflation and receiving periodic income from your portfolio. It is why I call it A Preservation Tale, because the objective during periods of high inflation is to preserve purchasing power. It is not to stay ahead of the game but to not fall too far behind. However, this tale is also useful for anyone that is looking for the types of assets to include in your portfolio.
Inflation is a complicated concept. It’s simply not easy to understand but if you choose to ignore it, your money will slowly and stealthily go from your pocket to someone else’s. Thus the subtitle of this tale is How Does Inflation Affect My Investment. As a teenager growing up in the 70’s I would hear the newscasters talk about inflation and price controls yet could never tell if it was a good or bad thing. Interest rates were going up as were house prices and income.
If you have $1 what do you do with it? How about $1000 or $10,000 or more? You only have two choices; you can either spend it or save it. If you save it you can put it in your pocket, you can bury it in the back yard, put it under a mattress or you can invest it. So when choosing between whether to invest money vs save money, you need to be sure you do what's best for you: Because most people correctly recognize that anything other than investing it means they will lose the ability to preserve purchasing power due to inflation they choose to invest it.
People say diversification is the only free lunch on Wall Street. By this they mean that if you properly diversify your portfolio you can reduce the risk of your portfolio without necessarily reducing the expected return. This is a powerful mathematical concept. What is diversification? It means that for every stock that you buy and add to your all-stock portfolio you have a good likelihood that it will add return as well as reduce risk or some combination of the two. In any event adding more stocks to an all-stock portfolio is a good thing. As a student of finance and as a financial practitioner I completely embrace the claim diversification makes and you should as well.
I often get asked the question, “how should I invest within my company retirement plan.” In specific, clients want to know how to invest in their company 401(k) or 403(b) plans. These plans offer the opportunity to grow money on a tax-deferred basis by investing in a number of mutual funds and to save a percentage of every paycheck. These are very good plans and I encourage all my clients to participate fully in these plans. I know that some advisors don’t encourage tax deferred saving, but fortunately, they are in the minority. You should save as much as you can in your company retirement account. Read A Compounding Tale to get a full appreciation of how your money grows over time, read A Coffee Tale to understand how consistent saving is a good habit and read A Partnership Tale to understand the power of tax-deferred compounding.
Topics: Wealthy Tales