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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Thursday, July 20, 2006

Inflation and Historical Investing: 1926-2000

Often when looking at a certain investments return people ignore inflation. As stated before investing in small cap and large caps bring with it more risk and more potential for reward. During this period inflation averaged 3.2% per year. When you examine closer that would mean the return of Treasury bills at 3.9% per year is barely out-pacing inflation while exposing you to little risk. Government bonds fair a little better with a 5.7% return, but is almost 3 times as risky as T-bills. On the other hand, large and small company stocks have 7 times the volitility of T-bills and 11 times the risk of T-bills. The average return of small caps was 17.3%, but because of the volitility its compound return is only 12.4% because of its peaks and valleys that go along with this type of investment. Large caps have a 13% return average over this period and 11% compound return.

This information is important when deciding what to invest in long-term, mid-term and short-term. Plus it give you an idea how to best allocate your funds while keeping your eye on how inflation will effect your investments.

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