Investment Risk

The reason we make investments is to grow our hard-earned money. With investing, there comes risk. There are different types of risk associated with different types of investments. Generally, the more risk you take on, the higher your return should be. This volatility is the price you pay for the return you expect.

Past performance is no indication of future results, but the stock market has trended upward over time. Let’s keep the discussion simple and just discuss stocks and bonds. Generally speaking, stocks are riskier than bonds. If you look at the long-term performance of stocks and bonds, you can see that you have a much higher return with stocks. Over time, this is true. According to Morningstar’s Ibbotson SBBI chart, if you invested $1 in January of 1926, you would have the following returns for each asset class at the end of December 2021:

  • $14,086 Large Cap Stocks—10.5% compound annual return
  • $53,034 Small Cap Stocks –12.1% compound annual return
  • $177 US Long Term Government Bonds—5.5% compound annual return
  • $22 US Treasury Bills—3.3% compound annual return
  • $16 Inflation—2.9% compound annual rate

Looking at the huge difference in the above returns, you may ask why in the world would anyone invest in bonds at all? Keep in mind that these numbers reflect 96 years of data and most of us will not have that length of time to invest. So, the answer to the question has to do with volatility. Most people cannot handle seeing the volatility when it comes to their own assets because most investors intend to use their assets for some purpose—like retirement.

In summary, the more risk you take, the higher your return should be. However, you must be able to stomach the volatility AND know when the end game is for this asset so that you can start taking risk off the table beforehand (planning). So, as you are looking at the values of your accounts, keep in mind what your intentions are for these assets.

If you are looking for a trusted partner to help you navigate financial decisions, we are here to help. Schedule a meeting with us today to see how we can help you with your own financial journey.

Financial Journey LLC is a registered investment advisor offering advisory services in the states of Alabama, Florida, Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

Personal Inflation Rates

There’s a lot of talk about inflation right now because the most recent inflation number was over 9%! However, this doesn’t mean that everything you spend money on has gone up nine percent.  That’s where we get into personal inflation rates.  Your personal inflation rate has to do with how you spend your money.  According to the Department of Labor, the 9.1% inflation rate is the average of all items over the last twelve months.  This means some things are higher than others.  In order to get to your own personal inflation rate, you would have to measure the increases for where your money is spent. 

Let’s take a look at a few items that are a part of the all items inflation rate1.

 

Food—10.4%

Energy—41.6%

Used Cars and Trucks—7.1%

Medical Care Services—4.8%

 

As you can see above, food and energy have increased significantly over the last twelve months.  If these two items are large components of your monthly expenditures, then your personal inflation rate could be even higher than 9.1%.  However, if your largest budget item is your mortgage, then don’t forget that the principal and interest parts of your monthly payment, do not change.  So, if 25% of your expenditures are principal and interest, then 25% of your personal inflation rate is 0%.

For some more information on inflation, check out this previous post about inflation.

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As interest rates are rising, you are starting to see the difference in savings account rates.  Your typical brick and mortar banks are not increasing rates as much as your online banks.  Check out www.bankrate.com to compare interest rates for your emergency funds (make sure there’s FDIC insurance as well). 

 

There’s also a lot of hype around I-Bonds as well.  The inflation rate for I-Bonds is great right now, but you need to make sure you understand the mechanics for how these work too, which can be found here.

Inflation is a part of life and something that we all have to deal with.  The important thing to remember is to look at your budget and see if you can make changes or substitutions to help combat inflation and to make sure you are including inflation as part of your financial plan. 

 

If you need help with your financial plan, Financial Journey is here to help. Schedule a call with us today!

 

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Alabama, Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way to be considered investment or tax advice.

 

1 https://www.dol.gov/newsroom/economicdata/cpi_07132022.pdf

Inflation

Inflation is the general increase in price level which corresponds to a reduction in purchasing power. Why do we care about it? We care about inflation because our dollars buy less. For example, remember when you could buy a gallon of gas for $1? Now it’s $3 a gallon. The same amount of money that would fill out tanks up will only fill up one third of a tank now!

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