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A dollar today really is worth more than a dollar tomorrow—if you invest it properly. And that can help the average American combat inflation.
Inflation rose 8.5% in July compared to a year prior, according to government data. That’s down from recent months, but still significantly higher than the interest rates on many savings products.
How can consumers keep up with such substantial price growth? By investing in assets that have historically outpaced inflation in the long run. Most financial experts recommend investing in diversified index funds, like the S&P 500.
Index funds are generally preferred to excess cash—meaning, cash you have on hand outside of your emergency fund—held in savings and individual stocks because they offer ownership in a variety of companies, allowing for greater diversity in your portfolio at a lower risk.
And given that the S&P 500 has historically returned around 10% a year, on average, they also help investors combat the loss of purchasing power inherent to inflation.
A rocky market shouldn’t dissuade you from investing. The sooner you start, the better, experts say, thanks to compound interest. “It’s less about timing the market, but time in the market,” says Charles Sachs, chief investment officer for Kaufman Rossin Wealth.
Using the S&P 500, for instance, $100 invested twenty years ago in 2002 would now be worth $496.60. When adjusted for inflation, the investment still retains 5.53% more purchasing power per year than funds held in cash, according to data from the U.S. Bureau of Labor Statistics’ monthly consumer price indexes.
On the other hand, the average savings account in the U.S. earns 0.10% annually. If you deposited $100 into a savings account in 2002, you would have only $102.2 by the end of 2022. With inflation taken into account, your deposit would be worth less now than it was in 2002.
That’s why billionaire investor Warren Buffett says the best way to build a prosperous portfolio is by buying index funds and holding them for the long term. That way, investors ride out the fluctuations in stock prices and returns year to year.
For example, the S&P 500 saw an annual return of -4.38% in 2018. Investors who sold shares missed out on an 18.4% return in 2020, and another 28.7% return in 2021, well above recent inflation figures.
“Long-term investors, in particular, can use patience to turn time potentially to an advantage,” writes the global investment strategy team at Wells Fargo.
That said, past performance does not guarantee future results. No one can predict where the market is headed, but history does indicate that smart, long-term investing is one of the best ways for consumers to stave off of the worst of inflation’s effects.
“We unfortunately can’t go back in time” to invest sooner, says Sachs. “But, going fifty years in the future, we’ll say today was the most valuable year to have gotten your dollars started [investing].”
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