What is inflationary risk? | Business Motivation Success | Online
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Title : What is inflationary risk? | Business Motivation Success | Online
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What is inflationary risk? | Business Motivation Success | Online business
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Inflation riskAlso known as purchasing power risk, is the chance that the cash flow from an investment will not be worth as much in the future due to changes in purchasing power due to inflation. Inflation risk refers to the risk that inflation will damage investment performance. Seeing results without accounting for inflation is a nominal return. The value that investors have to worry about is purchasing power, which is referred to as real returns.
Inflation risk is the risk taken by investors when holding cash or investing in assets not related to inflation. The risk is that the cash value will be reduced by inflation. For example, if an investor holds 40% of a $ 1,000,000 cash portfolio and inflation runs at 5%, the portfolio's cash value will lose $ 20,000 per year ($ 1 million x 0.4 x 0.05) due to inflation.
Portfolio performance after inflation has been taken into account is called 'real returns'. Inflation can erode the return value. Let's say an investor holds government bonds that pay 2% per year but inflation is 5%, in real terms they will lose 3% per year and when the bonds reach maturity the final value payment will be reduced by inflation.
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Why it matters:
Even though the record inflation of the 1970s is history, the risk of inflation is still a common concern for investor income. Inflation causes money to lose its value, and any investment that involves cash flow from time to time is exposed to this risk of inflation. The consequences of this can be serious: Investors get lower returns than they had originally expected, in some cases causing investors to withdraw some of the principal of the portfolio if they depend on it for income.
It is important to note that the risk of inflation is not the risk that there will be inflation, it is the risk that inflation will be higher than expected. This is one of the reasons investors and analysts speculate a lot about the inflation rate and study indicators such as the yield curve to get a sense of where the inflation rate is going. For example, many economists believe that a steep normal yield curve means investors expect higher inflation in the future and a sharply reversed yield curve means investors expect lower inflation.
Inflation riskAlso known as purchasing power risk, is the chance that the cash flow from an investment will not be worth as much in the future due to changes in purchasing power due to inflation. Inflation risk refers to the risk that inflation will damage investment performance. Seeing results without accounting for inflation is a nominal return. The value that investors have to worry about is purchasing power, which is referred to as real returns.
Inflation risk is the risk taken by investors when holding cash or investing in assets not related to inflation. The risk is that the cash value will be reduced by inflation. For example, if an investor holds 40% of a $ 1,000,000 cash portfolio and inflation runs at 5%, the portfolio's cash value will lose $ 20,000 per year ($ 1 million x 0.4 x 0.05) due to inflation.
Portfolio performance after inflation has been taken into account is called 'real returns'. Inflation can erode the return value. Let's say an investor holds government bonds that pay 2% per year but inflation is 5%, in real terms they will lose 3% per year and when the bonds reach maturity the final value payment will be reduced by inflation.
|
| img by youtube.com |
Why it matters:
Even though the record inflation of the 1970s is history, the risk of inflation is still a common concern for investor income. Inflation causes money to lose its value, and any investment that involves cash flow from time to time is exposed to the risk of this inflation. The consequences of this can be serious: Investors get lower returns than they had originally expected, in some cases causing investors to withdraw some of the principal of the portfolio if they depend on it for income.
It is important to note that the risk of inflation is not the risk that there will be inflation, it is the risk that inflation will be higher than expected. This is one of the reasons investors and analysts speculate a lot about the inflation rate and study indicators such as the yield curve to get a sense of where the inflation rate is going. For example, many economists believe that a steep normal yield curve means investors expect higher inflation in the future and a sharply reversed yield curve means investors expect lower inflation.
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