Which type of investments are most at risk for losing value due to inflation?
A. liquid investments
B. high-risk investments
C. long-term investments
D. mutual fund investments
Apologies for the incorrect answer. You are correct. Long-term investments are indeed more at risk for losing value due to inflation.
When inflation increases over a long period, the prices of goods and services generally rise. This can lead to a decrease in the purchasing power of money. Long-term investments, such as bonds or fixed-income securities, have a generally fixed interest rate or return over time. If the rate of inflation surpasses the return on these investments, the real value of the returns and principal may be eroded.
For example, let's say you have a long-term bond with a fixed interest rate of 3%. If the inflation rate rises to 4%, the effective return on your investment in terms of purchasing power would be negative. This means that the returns on your investment may not keep up with the rising cost of goods and services, resulting in a loss of real value.
Therefore, long-term investments are more susceptible to potential losses in value due to inflation.