|Inflation is just another risk.
But it's a very special risk.
.... prices going up. Therefore the amount that money can buy goes
down. Therefore the value of money goes down. If you chose to invest
in cash (or bonds) your investment is subject to inflation risk.
We mention this here, under the 'simple investing'
module, because it is so easy to forget. All our instincts towards
financial risk are geared towards preserving, or making, money.
That is wrong. We should be trying to preserve, or make, value.
We don't need money. We need the things that money
So what do we do?
There is a way of measuring returns in terms of value instead of
money. And this is the measure you should always use.
We think this is too difficult for your first run
through Simple Investing. You can prove us wrong by eventually following
the link to the appropriate bit of Advanced Investing in the sidebar.
For the time being, remember the following:
- With inflation, money will buy less tomorrow
than it does today
- If you put your savings in money (cash or
loans), and inflation persists, the amount you can buy with your
savings when you come to spend them will decline.
- If you put your savings in 'real' things
- businesses or commodities or antiques - and inflation persists,
the money value of these 'real things' will tend to rise.....
- .....but some things are more 'real' than others.
Inflation (and its opposite - deflation) has profound economic
consequences that go way beyond the simple change of purchasing
power of the pound in your pocket.
- If you use an adviser to help you with investment
choices, make him explain the effect on them of inflation (or