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Investing to Beat Inflation

Erik Sofranko

Posted on October 3, 2021 02:49

1 user

Even when the economy is expanding and inflation is on the low end, long-term investing is the key to building wealth that will significantly outpace inflation over time.

The Fed aims to keep the inflation rate in the U.S. near two percent. Currently, the rate is hovering near five percent with a stabilization expected next year. This means that the value of money that is kept in a traditional low interest bank account is slowing eroding in buying power due to inflation.


Since 1920, the U.S. stock market has averaged a near 10 percent per annum return. This takes into account all periods of economic expansion and contraction. More recently, the stock market has survived the 2000 dot com bubble burst, the 2008 recession caused by the housing crisis, and the 2020 coronavirus panic. This makes stock market investing a solid choice for long-term steady wealth building and a sure bet to beat inflation. The key is to never panic-sell when the market is falling. Keep investing at a steady pace, and you will reach your end goal.


Long-term investing is best done through mutual funds and exchange-traded funds (ETFs) because they have diversified portfolios with hundreds and sometimes thousands of different stocks that are spread out across many different industries. A diversified stock portfolio is built to withstand short term stock market downturns because certain industries do better than other during recessions.


The Vanguard Total U.S. Stock Market Index Fund (VTI) is a great choice to get started with long-term investing with a very low expense ratio. This fund contains almost 4,000 stocks and is meant to track the major U.S. stock market indexes (Dow Jones, Nasdaq, and S&P 500). Because index funds are passively managed, they have very low fees. On the other hand, mutual funds have higher fees because they are actively managed by a stock professional who is continuously trading in the fund in an attempt to outperform the stock market’s returns.


For example, the Fidelity Blue Chip Large Growth mutual fund (FBGRX) has an excellent track record of outperforming the stock market. Its after-tax returns have averaged about 12 percent over the past 35 years. However, with the extra growth comes additional fees. This fund has an expense ratio of 8/10 of a percent. This takes a little bit off the overall return, but the performance is still slightly better than an index fund ETF that is passively managed for very low fees.


Ideally, a portfolio should have a combination of ETFs and mutual fund(s) that you will consistently contribute to over a long period of time to reach the end goal for retirement. Social security alone will not sufficient support your desired lifestyle in retirement. Additionally, the decline in company pensions has made investing in the stock market even more imperative.


Overall, a well-diversified stock portfolio will have a combination of both U.S. and international funds. The Vanguard International ETF (VEA) and the Vanguard Emerging Markets ETF (VWO) provide reliable international diversification. There are periods when the international markets actually outperform the U.S. markets.

Erik Sofranko

Posted on October 3, 2021 02:49

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Source: Phys.org

"Buy low and sell high" says the old adage about investing in the stock market.

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