What do you think happens to the value of investments that grow slower than inflation?
They decrease in real terms (purchasing power). There is a lot of that going on with investmets lately.
thanks! :D
1) Q: What do you think happens to the value of investments that grow slower than inflation? > ANSWER:
When an investment grows slower than inflation, its real value in terms of purchasing power decreases over time. Inflation refers to the general increase in prices of goods and services over time, eroding the value of money.
To understand what happens to the value of investments that grow slower than inflation, you need to consider the concept of nominal return and real return. The nominal return is the percentage increase in the value of an investment, while the real return is the nominal return adjusted for inflation.
If an investment grows slower than inflation, it means that its nominal return is lower than the rate of inflation. As a result, the real return (considering inflation) will be negative or very low. In simple terms, the investment is failing to keep up with the rising prices of goods and services, causing its value to decline in terms of purchasing power.
For example, let's say you have an investment with a nominal return of 3% per year, but the inflation rate is 4% per year. In this case, the real return of the investment would be -1% (3% - 4% = -1%). This means that even though the investment is growing, its purchasing power is actually decreasing by 1% due to inflation. Over time, this can significantly erode the value of the investment.
It's important to consider the impact of inflation when analyzing and selecting investments. Investments that consistently grow slower than inflation may not effectively preserve or increase wealth over the long term. Therefore, it is generally advisable to seek investments that at least outpace or keep pace with inflation to maintain or increase purchasing power.