The Hidden Enemy Is Inflation

The Wall Street Journal published a great article in today about the arch-enemy of investor returns, inflation. While investors may feel good about nominal returns, the stock market has been absolutely horrid in this decade once adjusted for inflation. This aspect is too often overlooked by investors.

In fact, this line of thinking often plagues the layperson’s concept of housing as well. I have heard many people recount stories about how they bought a house for x amount and sold it for twice that 20 years later so obviously housing is a good investment. They completely ignore the long holding period and inflation (and maintenance costs, taxes, etc).

The human mind is wired to respond to certain constructs which have little significance in reality. For example, the endless of prices ending in 99. The financial difference between an item priced at $4.99 or $5.00 is puny but the psychological difference is huge. Investors must not let themselves fall into these mind traps — 10,000 on the Dow Jones may make you feel better until you look closely at the fine print and realize we still have some ways to go.

More on this topic (What's this?)
Gold – Coming Super Bubble
Are We Really Headed for Deflation?
Read more on Inflation at Wikinvest

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