Risk

There is another implication of my estimation that may skip your eyes.

The idea is simple: If the inflation rate is 4%, and you compare the nominal investment return of 5% to the actual 1%, the difference is huge.

However, if the nominal return is 15%, the actual rate is 11% - a more agreeable loss.



Do you see where we are getting at? Yes, a high risk investment would become more attractive!

Oh, don't get me wrong. I'm not promoting high risk investment.

Just consider this: Once again, let's have $100,000 to start with. If there is no inflation, a 5% investment return per year would give you $162,889, while a 15% investment return would yield $404,555. In other words, moving from a conservative to an aggressive investment approach would result in 2.5-fold difference in the outcome.

But, when we consider an inflation rate of 4%, the actual yearly yield of the conservative and aggressive approach would become 1% and 11%, respectively. Ten years later, the amount of money you have would be $110,462 and $283,942, respectively - again a 2.5-fold difference.

In other words, inflation becomes a blind and temptation for speculation.