Buying power is the simple answer. Inflation is a persistent increase in the price level of our goods and services. This hurts investors because it continually erodes the purchasing power of a portfolio. We see it every day, in the rising costs of health insurance, college education, food, gas, cars and rent. In addition to inflation, an investor must contend with taxes. These two factors demonstrate why growth is so critical to your portfolio.

Let’s look at an example of how inflation and taxes erode your money:

An investor earns 2.5% on his fixed income investment and he is in the 25% tax bracket.

You can see how much of an impact both of these factors will have on the real value of your net worth and income. Allocating at least a portion of your assets into a stock portfolio can provide your liquid assets with an effective hedge against inflation over the long run. For more information on inflation and how to combat it, contact an IHM Financial Registered Representative today.

How much has inflation affected us over the last three decades? Below is a price list of groceries taken from an ad in the January 4, 1978 edition of the Los Angeles Times, compared to today’s prices.