Written by Tyson Ray, FORM Wealth Advisors | CFP®, CExP®, CIMA®
I want to share with you an investment update, and some perspective, distilled from a lot of different research conducted by our Investment Committee here at FORM Wealth.
With every financial plan we customize for clients, we build in a “buffer” to help ensure that your assets grow to keep up with inflation. Because of inflation, goods and services cost more as time passes. And, of course, the higher the rate of inflation, the more prices increase. The annual inflation rate for the United States was 2.4 percent for the 12 months ending in May 2025.
An official definition of inflation is the rate of increase in prices over a given period of time. It represents how much more expensive a set of goods and/or services has become over a certain period, most commonly a year.
If we could grow our money without having to worry about inflation cancelling out some of that growth, investing would be much easier! Unfortunately, inflation is a constant part of the equation.
The impact of inflation over time
To gain some perspective about inflation, let’s look at its impact on the value of assets over time.
Below, the diagram on the left shows how inflation affects purchasing power — in this case, a $100,000 investment — over a period of 25 years, at rates of 2 percent inflation and 4 percent. You can see the value of that original investment decreasing over time, but at a lesser rate when inflation is at 2 percent.
When we set financial goals for the future, we have to anticipate the amount that an investment will decrease in value over time, due to inflation. The diagram on the right shows how inflation results in price increases.
Let’s say you are 25 years away from retirement, and you want to have a retirement account with purchasing power in the amount of $100,000 when you retire in 2050. If we factor in the impact of inflation at 2 percent, you will need to have $160,000 in that account in 2050 to equal the purchasing power of the $100,000 you have today. And if inflation averages 4 percent over that time period, you will need almost $250,000 in 25 years to match the purchasing power of $100,000 today.
Essentially, we are looking at the ability to go out and buy the same bag of groceries or the same vehicle or tank of gas 25 years from now that you might buy today.
We invest in the long term to try to offset inflation
People invest in the markets to increase their purchasing power and to offset inflation. When we invest, we are converting units of currency into units of ownership (shares) in some other type of asset class that can grow faster than inflation. And then, down the road, we can sell some of those shares we invested in to convert them back into units of currency.
Investing in stocks enables us, as individuals, to participate in the revenue growth of hundreds of the best-run and most profitable companies out there. The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the United States. The index actually includes 503 components because three of them have two share classes listed. This index is considered one of the best gauges of the performance of prominent American equities and the overall stock market overall.
As these companies pass along revenues or profits to their shareholders, those individuals get to participate in the stock market as investors.
The markets are constantly fluctuating — usually causing minimal increases or decreases and sometimes creating significant ups and downs. However, when we look at the stock market’s performance over time, its value has increased (not in a straight line, however, due to the ups and downs). The diagram below shows how the markets have risen over the past 20 years.
Small upward changes over time produce the revenues that increase the overall value of these companies. Historically, investing in the markets is one of the most effective strategies for beating inflation. So, why don’t more people invest?
In many cases, it’s because they don’t trust the process. Some people reason that because the markets decreased for a while or stayed stagnant back when we had major market disruptions, such as during the Great Depression, the dot-com bubble or Covid. This is why it’s so important to look at the “big picture,” not just a small segment of time. This gives us perspective!
The average annualized return for the S&P 500, from 1928 to the first quarter of 2025, was 9.96 percent. Adjusted for inflation, the real average annualized return for the same period is 6.69 percent. The markets have endured recessions, depressions, world wars, devastating natural disasters and many other significant upheavals over the past century — and always came out ahead. We expect that trend to continue long into the future.
Market declines are only temporary — Even the big ones
Market setbacks — the downturns — cause panic and fear, emotions that cause too many investors to bail out of the market and scare some away from starting to invest. The longer you sit on cash, the greater is the likelihood you will underperform.
Stock market declines are always temporary. The chart below shows how the markets declined during various upheavals throughout history — but notice how much the overall value increased over time:
The problem with bailing out of the market is that, although you might miss some of the worst days of a downturn, you will also miss the best days of the recovery. History shows that recoveries have followed declines, and investors who have stayed invested for the long term have typically benefited from the recovery.
The Great Depression, which began with the crash of 1929, resulted in a 79 percent loss in the stock market’s value. It was the worst drop of the past 150 years. If you invested $100 in the stock market at the time of the 1929 crash, it would have declined in value to $21 by May 1932. It took four years to recover from this significant downturn, but the markets went on to perform well.
Once you average the stock market’s performance over all those years — through the volatile upswings and downturns — you will see that it handily beats inflation.
One of the most important jobs we have as your financial advisory team is to keep you focused on your long-term goals, encourage you to keep following the financial plan we customized for you and remind you to ignore the news and noise about what the markets are doing.
How to survive the setbacks
Of course every economic shift is different, and your situation is unique. The approach we take to preserve your future purchasing power will be different than the approach we take with someone else. But in general, here are three strategies to follow that can help you survive setbacks.
- Keep cash on hand. We know that the markets will go up and down — but we don’t know when, or by how much. So it is very important for you to have cash reserves available — an emergency fund — to use for unexpected expenses or long-term market contractions. With 12 to 14 months’ worth of typical expenses set aside, you will be less tempted to sell assets when a recession shows up. Being prepared goes a long way toward preventing panic. With cash reserves available, you don’t feel the need to react to market fluctuations.
- Focus on the long term. The more you focus on the day-to-day value of your portfolio, the more you focus on short-term fluctuations and allow yourself to react to them emotionally. Those emotions can cause you to distrust the investment process, which most likely will keep you from being able to take advantage of the growth that is likely to follow the contraction. Participating in the stock market — which supports the companies that produce the essential and non-essential goods and services we use every day — is historically one of the best ways to beat inflation and to build wealth.
- Work with your advisor to balance risk with reward wisely. I strongly advise that you work with your financial advisor to strike a healthy balance between risk and reward. We don’t want you to take so much risk that you’re being reckless with your money. On the other hand, we don’t want you to take such a conservative approach to investing that you miss ample opportunities for growth in the markets because you are afraid of losing money. That is a “fool’s errand”! Again, if you invest for the long term, you are most likely to come out ahead.
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I hope you will follow this valuable advice: Invest in the stock market (with your financial advisor’s guidance), and then keep your investments where they are! Failing to invest is a lost opportunity to beat inflation and to grow your purchasing power, as is bailing out of the market during a downturn.
Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.
The S&P 500 is not the only index used as a benchmark for measuring the performance of a portfolio. Depending upon the holdings in your portfolio, your investment objectives, and your risk tolerance, it may be more appropriate to measure performance against a different benchmark.
Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
