Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Inflation and the Long View

Inflation has been so low for so long that investors could easily have become complacent about the impact of this value-eroding force on their portfolios. That would be a serious mistake. Even relatively mild inflation has a significant effect on your investments over time.

Some inflation can be a good thing for the economy. A steady rise in prices can encourage spending by consumers and businesses. And working people usually don’t mind a bit of inflation, as wage increases tend to keep pace with rising consumer prices.

It’s a different story for savers and retirees. After all, money loses value because of inflation—prices nearly tripled between 1980 and the end of 20141—and rising prices eat away at the real returns on your investments.

Ever since the financial crisis, the annual rate of inflation has generally been below 2%. But if you go back a few decades, things start to look a little different. The average annual inflation rate was about 3.5% between 1980 and 2014. Your investment returns over that period would have had to match that rate just to keep your portfolio treading water. To build wealth, of course, you need to do better. And the recent era of low interest rates hasn’t helped.

The good news is that there are several precautions you can take to help insulate your portfolio against inflation. Stocks have historically delivered solid inflation-adjusted returns. You could also consider adding Treasury Inflation Protected Securities (TIPS) to your bond portfolio. The coupon rate on TIPS is fixed, but the principal value is adjusted to keep pace with inflation—so interest payments fluctuate along with inflation. Real estate and commodities can also help protect a portfolio against rising prices.

So check in with a Schwab representative to find out what steps you could take to add inflation-hedging features to your portfolio. Inflation may not seem like a major problem now, but experienced investors know that they can’t ignore it—even moderate annual changes can have a big impact over time.

1Bureau of Labor Statistics data as of 4/23/2015.

Time In, Not Timing
Smart Beta Investing: Are All Strategies the Same?
Are Smart Beta Funds a Smart Move?

Important Disclosures

Treasury Inflation Protected Securities (TIPS) are inflation-linked securities issued by the U.S. government whose principal value is adjusted periodically in accordance with the rise and fall in the inflation rate. Thus, the interest amount payable is also impacted by variations in the inflation rate as it is based upon the principal value of the bond. It may fluctuate up or down. Repayment at maturity is guaranteed by the U.S. government and may be adjusted for inflation to become the greater of either the original face amount at issuance or that face amount plus an adjustment for inflation.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.