We're taking a look at interest rates, inflation, and your savings. We'll show the importance of holding a diversified portfolio of investable assets through simple and digestible charts.
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You might think that holding cash is a safe investment, but it means accepting the fact that inflation continually diminishes your purchasing power. This leads to a consistent decline in the value of your money. In order to illustrate this phenomenon, we have created a graph that demonstrates the purchasing power of $10k since 2010. Over this period, the cumulative effect of inflation has resulted in a reduction in value of nearly 30%.
We have created a chart that compares the inflation rate with the risk-free interest rate. The differential between inflation and the interest rate, shown in light blue, is nearing zero, indicating that the Federal Reserve is making progress in managing inflation. This is an encouraging sign for the economy. It is worth noting that despite this progress, inflation remains significantly high, sitting at 5%, or twice its long-run average of approximately 2.5%.
By investing your money in assets that have historically outperformed inflation, such as stocks and commodities, you can potentially earn returns that exceed the inflation rate. This means that your money's purchasing power can increase over time, allowing you to achieve your financial goals.
Investing in a diversified portfolio of assets can also help to reduce the risk of losing money due to inflation, as different types of investments may perform differently under various economic conditions. Therefore, investing to counter inflation can be an effective strategy to protect and grow your wealth over the long term.
Cash maybe stable over short periods, but it tends to lose value consistently in the long term. On the other hand, stocks, bonds, commodities, and real estate exhibit volatility over shorter periods, but they outperform cash over longer periods. To illustrate this point, we have plotted the 20-year performance of several assets, including the S&P 500, Nasdaq-100, Gold, Silver, Oil, Real Estate, Government Bonds, and Inflation. To build long-term wealth, take a long-term perspective. We can see that every asset class we've chosen has outperformed inflation (in light green).
Now let's examine the return and volatility characteristics of each asset class. The primary objective of any portfolio is to maximize returns while minimizing risk or volatility. Each asset class possesses a unique risk-return profile, and a diversified combination of them ensures consistent and sustainable wealth growth.
Investing in an ETF-based strategy is a straightforward approach to building a diversified portfolio. Our 'Go with the Mo' strategy selects two top-performing ETFs from different asset classes. Based on our backtests, this strategy has performed exceptionally well over the past decade, surpassing the benchmark on both raw return and risk-adjusted basis.