Inflation, a persistent increase in the general price level of goods and services, can significantly impact a client's portfolio, both in terms of asset allocation and investment strategies.
Firstly, inflation erodes the purchasing power of money, meaning that the same amount of money buys fewer goods and services over time. This directly affects the real return on investments, as the nominal return (the percentage increase in the value of an investment) needs to outpace inflation to provide a positive real return. For example, if an investment earns a 5% nominal return but inflation is 3%, the real return is only 2%.
Secondly, inflation can impact asset allocation by influencing the relative at....
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