How can investing help someone beat inflation?

This concept doesn't really make sense to me. Can someone clarify how investing can help an individual beat inflation?

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February 2017
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I love this question. Inflation eats away at purchasing power, meaning if you have $1 now and do nothing with it, it just sits on the kitchen table (the kids do their homework around it). If we spent that $1 now, we could buy 10 widgets (a pretend product). If we leave it on the kitchen table and pick it up in ten years, it might only buy 7 widgets. Our money was safe, but the $1 is worth less. The price of the widgets increased while the dollar stayed the same. With inflation, the price of everything generally increases.

We have not had inflation in a long time and the fear is that many people that own things like bonds will lose purchasing power and be able to buy less widgets.

Investing can be a hedge against inflation in two ways. 1) The growth in the investment regardless of inflation and, 2) the investment might be a "real" asset and go up in price with everything else.

If we invested the $1 example:

  1. Bought a bond that returned 2% (it might not keep pace with inflation but we might be able to buy 8 widgets instead of 7)
  2. We invest in real estate that had a total return of 3.5% ("real" assets often keep place with inflation which will often increase their value along with other assets)(you can still buy 10 widgets)
  3. We invest in stocks that return 6% (the companies have "real" assets that might be worth more and some companies might have pricing power, able to increase prices as prices in general rise)(you can now buy 15 widgets)

Good Luck!

Mark Struthers CFA, CFP®

February 2017
February 2017
February 2017
February 2017