Inflation is a term that gets thrown around a lot in the news and in conversations about money, but not everyone understands how it actually affects investing. Simply put, inflation is the general increase in prices over time. When inflation goes up, the money you have today buys less in the future. That’s why it’s a key factor to consider when you’re thinking about your long-term financial goals.
When you invest, one of your main goals is to grow your money over time. But if inflation is rising, your investments have to grow faster just to keep up. For example, if your investment earns a 5% return in a year, but inflation is 3%, your real return is only 2%. This is why keeping money in a savings account with a low interest rate isn’t enough over the long term—it actually loses value when inflation is high.
Different investments react to inflation in different ways. Stocks tend to keep up with inflation over long periods because companies can raise their prices to match the rising costs. Real estate also often keeps pace because property values and rents usually increase. On the other hand, bonds and other fixed-income investments can suffer because they pay a fixed amount of interest that doesn’t change with inflation.
To protect your portfolio from inflation, it’s important to diversify and include assets that typically perform well in inflationary periods, like stocks, real estate, or Treasury Inflation-Protected Securities (TIPS). Understanding how inflation works and planning for it in your investing strategy can make a big difference in protecting your money’s future value.
