Chapter 3 The Enemies of a Stock Portfolio

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

—John Maynard Keynes

One of the biggest enemies of your investment portfolio is rising inflation. Though stocks can fare better than many other investments during such periods, as the 1970s demonstrate, periods of inflation can still reduce stock returns. Inflation is when the cost of goods and services you buy rise in price. For example, if a can of Coke cost $1.50 last year and $1.65 this year, then that $0.15, or 10 percent, increase is inflation. The actual inflation metric that the government publishes is more complicated. This is because many things are purchased beyond Coke, so inflation calculations combine a diverse set of products and services according to their importance to get to one average inflation number. For example, food, which everyone needs, has a 13.8 percent weighting out of the 100 percent total, indoor plants and flowers, which are less commonly purchased, have a much lower 0.1 percent weighting. The price change of each component is monitored by the Bureau of Labor Statistics, which reports on U.S. inflation monthly. At the extremes over the past year, the price of televisions fell 15 percent, but the price of certain footwear rose 8.3 percent. Most products stay relatively close to the average inflation rate, which two-thirds of the time in U.S. history has fallen ...

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