Purchasing Power Risk

In our last blog we discussed risk and promised to talk about various types of risk.  Today I want to talk about Purchasing Power Risk.  Although we don’t often hear it discussed, changes in the price levels of consumer goods result in risk.  Inflation – the rise in prices over a period of time – tends to reduce purchasing power. As the prices go up, the purchasing ability of our fixed amount of money declines.  In other words, if investments don’t grow faster than the rate of inflation, the investor is losing money.  Therefore, it is important that investors look for investments that produce a rate of return that makes up for lost purchasing power.

 

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