Free Wealth Management Guide Investing Proceeds From the Sale of Farm or Ranch | Page 7

Inflation Risk
When your investments don’t keep up with the rate of
inflation, the purchasing power of your money declines.
This is known as inflation risk or purchasing power risk.
While CDs and money markets are safe from market risk,
they have historically not outpaced the rising cost of
inflation.

national companies, large companies, small companies,
growth companies, value companies etc. With bonds, you
can choose to invest in corporate bonds, government
bonds, municipal bonds, high credit quality bonds, low
credit quality bonds, short-term maturities or long-term
maturities. With commercial real estate, you can invest in
raw land, retail, office, multi-family, industrial etc.

The effects of inflation can be devastating. For example,
if your annual living expenses are $50,000 per year today,
you will need $109,556 in 20 years at 4% inflation to
maintain the same standard of living. Ronald Regan once
stated: “Inflation is as violent as a mugger, as frightening
as an armed robber and as deadly as a hit man.” If your
goal is to have your investments provide an income that
keeps pace with the rising cost of living, you need to own
investments that have historically outpaced inflation.

While Wall Street and the investment media often promote stock picking and market timing as the key to
successful investing, this is simply not true. Studies have
shown that asset allocation is the biggest factor affecting the performance of a portfolio. In other words, the
asset classes you choose to invest in and the percentage
of your portfolio that you allocate to each asset class
will likely have a greater impact on your portfolios return
than any other factor.

Real Return
The Real Return of your investments is the net return you
earn after subtracting taxes and inflation. If you are not
earning a positive real return, you are going backwards in
terms of your purchasing power. For example, if you earn
5% on a CD and taxes and inflation are 33% and 3.5%,
your real return is 0%.

In the late 1980s and early 1990s, Gary Brinson, L Randolph Hood, and Gilbert Beebower conducted two studies that significantly affected the way people invest
their money. These studies, published in 1986 and 1991,
examined the performance of 91 large U.S. pension
plans between 1974 and 1983 and found that, on average, mor