Inflation and Investment Returns over the last 20 years
The hottest topic on the nations mind right now is arguably inflation. Everything seems to be skyrocketing in price from gas, groceries, and housing. I want to take a deep dive in the hopes of helping you better understand the current economic situation and let you decide how its best for you moving forward in how to combat inflation.
First lets take a look at the overall Inflation Rate. The CPI inflation as of February 2022 has the United States at a 7.9% rate. This is the 7th highest rate of inflation in the world right now (see chart above). The Consumer Price Index had the following increases:
Gas: up 38%
Energy Services: up 12.3%
New vehicles: up 12.3%
Used vehicles: up 41.2%
Every Major metro area in the US has seen a double digit % increase in home prices over the last year. The highest increase was 32.6% in Phoenix, Arizona. The chart below shows that these 20 major metro areas have an average increase of nearly 50% in prices over the past 5 years and a 140.8% increase over the last 20 years.
There are 2 sides to this story. IF you have been investing in real estate over the last few years or dating back 20+ years, you have seen a massive increase in your property value resulting in huge gains to your equity per property. This has drastically increased your net worth. The downside is that if you are just now starting to look at real estate to buy as a primary residence, investment or even just to rent you are paying a sizeable amount more. Many have been priced out of certain areas unable to afford the cost of living.
To break this down further lets look at the economic data provided to us from FRED. In Q4 of 2001 the average home price in America was $171,100.00. Compare that to today the average home price from Q4 2021 was $408,100.00. Buying a home today is much more expensive and those who bought property years ago are reaping the benefits by making $100s of thousands of dollars.
So the big question, how can you keep up with the costs of inflation and continue to afford the costs of goods and services as prices continue to rise. The simple answer is to invest. Consult with a financial advisor and figure out the best plan according to your individual or families needs given your monthly expenses and income. If you have an annuity or structured settlement I encourage you to speak with a representative at our firm to find out how much money you have access to as a lump sum today. I would then advise taking that information to consult with your financial advisor or find one to see if the structure of your policy is the best option for you short or long term. There may be much better investment vehicles available to you that result in greater wealth over time. We have found that many structured settlement / annuity polices are extremely conservative by nature and may not be keeping up with the costs of inflation if it lacks a Cost of Living Adjustment. (refer to our video on what a COLA is if you are unsure.)
You can also elect to gain access to your cash now as a lump sum if it better helps you with paying for necessary living expenses or getting out of debt.
Lets take a quick look at some of the best performing asset classes over the last 10 years, see chart below.
Bitcoin was by far #1 with an annual return of 230%.
Nasdaq QQQ was #2 with 20% annual growth
2nd to last in performance was Cash. To me this shows that you cannot save your way to wealth and we must have investments not only to keep up with inflation but also to have our money work for us as hard as we work for it.
Warren Buffett famously said “the stock market is a device for transferring money from the impatient to the patient.” Its very difficult to time any market or asset class on when is best to invest, but patience over long periods of time has historically translated to massive returns.