Thursday, August 13, 2009

Don't forget about inflation risk

While the stock market has rebounded quite a bit in the past five months, it is still down significantly from its 2007 highs. That makes it an easy target for critics to attack, such as this comparison (via Bargaineering). Some people have attempted to refute these criticisms, however others continue to fuel the fire.

With the run up in value in the mid 2000's, I think people have conveniently forgotten that the stock market can be extremely volatile over the short term. Conservative investment vehicles such as CDs are definitely more appropriate for short term savings, but anyone thinking about using them for long term investing should definitely consider inflation risk.

According to some predictions, inflation may make a strong come back as early as 2010. So if you have a CD earning 2-3% (which is not that uncommon these days), it is quite possible that it will barely keep up with inflation over the long haul.

While my investment allocation may seem aggressive to most people, I think I am actually pretty risk averse thanks to a deep rooted fear of inflation eroding the value of my money. As I have written before, I plan to slowly shift my assets into more conservative investments as I reach closer to retirement age, so that I can reduce my exposure to market risk.

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