Will Your Investments Outpace Inflation? The Answer Is More Likely to Be ‘Yes’ if You Choose These Assets

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

It’s important to beat inflation when you’re investing for a far-off goal. 

You’ll often hear that it’s important to save for retirement rather than rely on Social Security benefits alone. But the money you keep socking away in your IRA shouldn’t just sit in cash. Rather, it should be invested in different assets so it grows into a larger sum over time.

Now, some people are afraid to buy stocks because they’re known to be very volatile. But if you don’t buy stocks, your portfolio may not do a good enough job of outpacing inflation. And that could leave you in a tough spot once your career wraps up and retirement rolls around.

Why you need to beat inflation

The rate of inflation has been pretty out of control over the past year and change. But usually, inflation is far more moderate, and it’s actually a natural thing.

The problem, though, is that thanks to inflation, over time, the value of a dollar tends to decline. So something that costs $1 today might cost $1.50 in 10 years from now, and $2 in 20 years.

That’s why when you’re building retirement savings, it’s important to invest your money in a manner that can beat inflation. That way, you’re more likely to end up with the buying power you need later in life.

Stocks could help you outpace inflation

The return you get in your stock portfolio will hinge on factors like the companies you choose to invest in and how long you hold your assets for. But one thing you should know is that the S&P 500, which is generally considered representative of the broad stock market, delivered an average annual return of 11.88% between 1957 and 2021, according to Investopedia.

This doesn’t mean the S&P 500 performed well every year during that time period, but that 11.88% is an average over several decades. And if you invest in stocks over a longer period of time, like 30 or 40 years, you might end up with a return in your portfolio that’s comparable to 11.88%. This holds true whether you buy a diverse mix of individual stocks or invest your money in broad market ETFs (exchange-traded funds).

Meanwhile, let’s say you invest $250 a month for retirement over a 30-year period. If your portfolio generates an average annual return of 11.88%, you’ll end up with over $707,000 to your name.

Don’t shy away from stocks

Stocks can be riskier than more stable assets, like bonds. But when you go heavy on bonds, you run another risk: not generating a high enough return to beat inflation.

If you’re looking to buy stocks, hold them for a few years, and then cash them out at a profit, then yes, you may end up losing money. But when you’re talking about an investment window that’s decades long, stocks become less risky. And so it pays to make them the focus of your investment strategy if you’re trying your hardest to build a retirement nest egg.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More