Skip to content

Why Inflation (and Not Returns!) Should Be Your Concern

By: Curt Stowers

Which is More Important­—Inflation or Returns?

Returns matter—but inflation is a MUCH bigger concern. Read on to find out why!

Many people who find out I’m a financial advisor want to know what I think about the market/what I think the market will return. They are normally disappointed when I tell them that I think the market is efficient, and identifying winners and losers is a fool’s game. I let them know that long-term diversified portfolios have returned 8-9%, and I feel that is a good assumption for what a diversified portfolio will return in the future.

You see most people think the key to achieving financial security in retirement is found via focusing on returns. In my opinion, it’s NOT the returns. It’s the returns relative to the inflation. Furthermore, inflation is insatiable when it comes to devouring purchasing power.

Is Inflation Really a Big Deal?

Absolutely! If you assume a 3% inflation rate, you’ll see that, in thirty years’ time, things cost around 2.4 times as much as they do now:

  • That means your $400K house is going to cost $960K.
  • That means that your monthly spend of $7K is going to be at $16.8K per month.

Think about trying to pay these inflated rates TODAY with your current income. Scary.

Yes, Virginia, inflation is a really big deal!

So There’s Nothing I can Do?

I didn’t say that. What you can do is plan appropriately to hedge against inflation. First and foremost, you need to understand what you are currently spending AND the difference between needs and wants.

From preparing thousands of plans, I can say with complete confidence (and much amazement!) that most families are unaware of their current spending patterns. Furthermore, most families are unwilling (notice I did not say unable!) to identify what they NEED versus what they WANT in terms of lifestyle.

The number one thing you can do to ensure financial freedom is to:

  • Fully understand your expense structure AND
  • Establish a “bare-bones” spending plan in case you need to “pull in the reins” at some time in the future.

In conjunction with addressing spending, you can—and should in my opinion—explore implementing an explicit Investment Policy Strategy (IPS) that focuses on putting a diversified portfolio in place. Equities have shown that they are an extremely effective hedge against inflation, and, accordingly, they need to play a significant role in just about all IPS’s.

But what if I have “enough” already?

Some will argue that if you have “enough” you don’t need to worry about equities and can go strictly with bonds or cash. Perhaps. But there are two concerns I have here. First, are you absolutely certain about your assumptions/confident that you have appropriately factored in inflation into your projections? If not, things could get ugly out in the future!

OK, but what if I have a large nest egg?

Second, if you have an oversized nest egg relative to your expenses, are you doing the right thing by investing hyper-conservatively? I can’t help but think of the parable of the talents when I think about this mindset. In my opinion, to those who much is given, much is expected. If you’re blessed with financial success, you may want to consider how you’ll feel at the end of life in relation to how you leveraged this success to help others.

Bottom line is that, while both returns and inflation are important, inflation often has the outsized impact AND is under-considered as families plan for the future. Please don’t fall into this trap.

Would You Like More Support?

  • Do you have a well-defined Investment Policy Strategy that is used to drive your investments in support of a comprehensive financial plan?

  • If not, would you like to partner with someone who is used to helping people get through these struggles and (then, with confidence) implement portfolio strategies in a systematic manner while focusing on your desired outcomes?

If so, feel free to send us an email or give us a call. We’d love to have the opportunity to help you find a bit more peace of mind when it comes to investing.


Photo credit: Sean Robertson on

F5 Financial

F5 Financial is a fee-only wealth management firm with a holistic approach to financial planning, personal goals, and behavioral change. Through our F5 Process, we provide insight and tailored strategies that inspire and equip our clients to enjoy a life of significance and financial freedom.

F5 Financial provides fee-only financial planning services to Naperville, Plainfield, Bolingbrook, Aurora, Oswego, Geneva, St. Charles, Wheaton, Glen Ellyn, Lisle, Chicago and the surrounding communities; to McDonough, Henry County, Fayette County, Atlanta and the surrounding communities; to Venice, Sarasota, Fort Myers, Port Charlotte, Cape Coral, Osprey, North Port, and the surrounding communities; and nationally.

We'd love to have the opportunity to hear about your situation. Contact us here to schedule an appointment for a consultation.

Learn more about What We Do.

Helping You With

Wealth Preservation – Wealth Enhancement – Wealth Transfer – Wealth Protection – Charitable Giving