Inflation and Investing: Protect Your Portfolio's Purchasing Power

What Inflation Does to Your Money

At just 3% annual inflation, the purchasing power of your money is cut in half in about 24 years. Money sitting in cash or low-yield savings accounts loses real value every year, even if the dollar amount stays the same.

How Inflation Affects Different Assets

• Stocks: Historically return 7–10% annually, well above inflation. Companies can raise prices as costs rise.
• Bonds: Fixed interest payments lose purchasing power when inflation rises.
• Real estate: Property values and rents tend to move with inflation.
• Commodities: Direct inflation hedges; prices rise with the cost of goods.

TIPS: Inflation-Protected Bonds

Treasury Inflation-Protected Securities (TIPS) adjust their principal in line with the Consumer Price Index. This preserves your purchasing power in real terms. They offer lower yields than regular bonds but provide guaranteed real returns.

Building an Inflation-Resilient Portfolio

1. Hold the majority in diversified equities for long-term growth
2. Include some real estate exposure through REITs
3. Keep cash to a minimum — only what you need for near-term expenses
4. Avoid long-duration bonds during rising inflation periods

The biggest inflation mistake is holding too much cash for too long. Equities remain the best long-term hedge for most investors.