Protecting Your Purchasing Power
By Paul Hynes, CFP®
Many American consumers today are feeling the sting of rising prices. This “pain” is particularly evident at the grocery store and gas station.
Here’s some perspective. According to the Bureau of Labor Statistics consumer price index, $1 in 1970 would have the equivalent purchasing power of about $7 in 2021, an increase of $6 over 51 years1. This illustrates the loss of purchasing power we call inflation. Over time, a dollar doesn’t buy nearly as much today as it once did.
How does one address inflation? Historically, owning stocks in a portfolio can help protect against purchasing power risk. While the dollar had an average inflation rate of 3.89% annually over the past 51 years1, the US stock market could have returned about 10%, based on the S&P 500 Index for the same period2. Stocks, then, have been a good inflation hedge, earning about 6% per year on average above the inflation rate2. That’s why investors are often willing to take the additional ups and downs, or volatility, of owning stocks.
What about bonds? As an individual approaches retirement, they may not want to take on as much volatility within their investment portfolio. So, many investors look to balance the stocks with bonds. Bonds are generally of lower risk and therefore have a lower return than stocks, and also less volatility.
Some bonds are different than others. There’s a special type of bond in the bond tool chest called “Treasury inflation-protected securities,” known as “TIPS” for short. TIPS deliver the highest credit quality of the US Treasury, while hedging against unexpected inflation. As inflation rises, so does the value of TIPS. This means that if inflation unexpectedly rises, the value of the money invested in TIPS should also increase. While we don’t currently use TIPS in our portfolios, it is something we will continue to consider and evaluate as conditions change.
We can’t know what inflation will be in the future. That’s why investors should be aware of the tools available to them to hedge against purchasing power risk. By combining the right balance of stocks and bonds, investors may be better positioned to mitigate the effects of inflation and prudently grow their wealth over time.
At HearthStone, our mission is to preserve wealth and wellbeing. We take that mission seriously. Talk with us if you have any questions about your personal situation and how to protect your purchasing power. We’re here to help.
1Why a dollar today is worth only 14% of a dollar in 1970
2Stock market returns since 1970
The S&P 500 Index is used to measure the data of stocks included in the index. The index is not managed and does not incur fees or expenses. It is not possible to invest directly in an index.
This information is intended to inform the public at large about this important issue. It is not intended to serve as legal or medical advice.