Well, folks, it’s time to return from our summer vacation themes and get back to reality. Don’t be alarmed, I promise I will not bombard you with doom and gloom scenarios and statistics to fog your brains. Instead, we are going to start at the beginning. That’s right - this month, we are getting back to basics. We will start this week with a discussion about money and the purchasing power it gives us. Most importantly, I want to talk about how we can maintain that purchasing power regardless of what the market or economy is doing. Our behavior has a lot to do with maintaining purchasing power, and as we dig into the subject this month, I’ll be giving you tools and tips on how to manage your emotions and your money’s power.
What is Purchasing Power?
Purchasing power is a currency's value expressed in terms of the goods or services it can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you are able to purchase. You lose purchasing power when prices rise and gain purchasing power when prices go down. We can’t talk about purchasing power without talking about inflation. And I know we are all too familiar these days with the effects of high inflation.
Inflation
Inflation changes the value of money over time. Many of us have had that time-tested conversation with someone older than us from a different generation, which goes a little like, “Back in my day….” And it is usually followed by something like, “We could get ten pieces of candy for one nickel...” You get the idea. What a dollar, or a nickel for that matter, buys today is not the same as what it bought ten years ago. Although, thankfully, wages increase along with prices.
Inflation is tracked by the Consumer Price Index (CPI), which tracks the cost of a “basket” of various goods and services. Each month, the U.S. Bureau of Labor Statistics takes the average cost of the items in order to determine the change over time.
What Does Purchasing Power Affect?
Purchasing power not only affects consumer goods and services, but it also impacts stock pricing. On top of that, it can affect the economy's general health. Interest rates can also affect your purchasing power as an individual. Economists often compare purchasing power in the U.S. to that of other countries, looking at the same basket of goods in two separate countries to see how our dollar measures up in other countries, taking into account currency exchange rates.
How Does Purchasing Power Affect Your Investments?
Rising inflation can erode the purchasing power of your investments. In other words, the money you invest can be worth less when you need it. For this reason, it is of utmost importance to focus on investments that earn a rate of return greater than the value of rising inflation.
This is where your financial planning team at Grover Financial Services comes in! We work with you to ensure that you are in a portfolio that will uphold its purchasing power over time, standing up against inflation but at a risk level you are comfortable with. One of the most important ways to make sure your money is worth more when you need it, in retirement, is to have a long-term mindset. Running from the markets when things get volatile is a great way to lose money over the long term. We will talk more about this next week when we discuss human nature’s tendency to attempt to time the markets.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.