Deep Thought 1: Insight on Inflation
by the Greedy Farmer
by the Greedy Farmer
Let’s talk about inflation. Who cares about it? It is low and what does it matter anyway?
You have to look at the math to really get it in your gut (every farmer knows, your gut is where you do your best thinking).
I generally like to use a 3% rate since that is what the world experiences over the long run. For this example, however, I will use a rate of 2% since inflation pressure is subsiding, at present, and is likely running in the 1.50 – 2.00% range.
Inflation
You have $100.00 today which allows you to buy $100.00 worth of stuff.
One year from now, assuming 2% inflation – you are able to buy $98.00 worth of stuff. This is still pretty good, you don’t really notice the difference. [$100 less 2% or x .98 = $98.00].
Year two: $98.00 x .98 = $96.04
Year three: $96.04 x .98 = $94.12 … let’s jump ahead a few years…
Year ten: $81.71 = yuck. That’s beginning to be a kick in the pants!
Now when your great uncle farmer Fred complains he used to buy a new roll of baler twine, way back when, for $2.00 and he now pays $14.80 … you get it! The dollars keep shrinking, in terms of purchasing power, so you need to use more and more of them to by the same amount of stuff.
You still just think he is a whiny farmer but after you look at a little math you too can see even very low inflation eats away at the purchasing power of money. Inflation is a real and present DANGER. Ignored or not, it is ever present.
This relates to discussions around risk. A no-risk strategy does not exist. So-called low-risk investments or conservative funds or ETFs are generally low-return, that means they compete poorly with inflation. A managed risk strategy is what we strive to achieve. Managed risk means we create much more gain from the overall portfolio and stay well ahead of inflation.
In summary, to beat inflation:
The Greedy Farmer believes a fully diversified portfolio is the only way to offset inflation and other risks. This portfolio needs to include growth and/or value stocks, as well as other components, all put together as part of an ever-shifting, ever-managed portfolio. Good growth is the only low-risk, inflation beater strategy over the longer term.