Can You Outpace Inflation?

Picture of by Dr David Phelps

by Dr David Phelps


 an you outpace inflation?

We are in a new generational cycle right now. We've had 40 years of disinflation and decreasing interest rates, starting back in 1980 when mortgage interest rates were in the double digits, and the fed funds rate was 20%.

We've seen over 40 years of downward tapering of those interest rates along with very, very low inflation. Instead of inflation, Disinflation is really what I call it. 

We turned the corner over a year ago to a period of time where inflation is ramping up. 

This is the first time in a generation-and-a-half where we've experienced that in this country. That's a totally different dynamic when it comes to looking at returns on investments because we have to factor in inflation. 

Let’s look at where we are right now and what average returns you can get with typical investments recommended by financial advisors.

Inflation, based on the CPI, is running right at 8.5%. Now, is that really the true number? 

That's what the government reports.

I would say, you typically need to multiply that number by two because the numbers, unfortunately, are manipulated. Really the numbers are probably running about 17%. 

Inflation - Dr. David Phelps provides insights
Dr. David Phelps provides his insights on inflation and alternative investments.

But for the sake of example let’s still use the 8.5% that the government reports, and let's say we’re also at a point in life where we need to take a very conservative approach to our investments, so we need to get out of the stock market. Typically, what financial advisors will tell you to do is get into bonds or treasuries, which today might pay around 1.5%.

If we look at the rate of return of 1.5% and we factor in the rate of inflation, in this case 8.5%, our real return of investment is -7%. 

That is a negative 7%. That means every year we're going backwards.

Another way to look at this is what I call the rule of 72.

The rule of 72 is when you take the rate of inflation, the loss of the purchasing power of the dollar, and you divide it into the number 72.

Let’s use a nominal rate of inflation like 8%. 72 divided by 8 equals 9. That means it takes nine years for your money to be halved or be worth half its value. If we had a $1 million nest egg, nine years later that would be worth half its purchasing power at $500,000.

You can plug in whatever number you want to. If inflation stays high, and you believe as I do that, the CPI is not true, maybe the real rate is 12%. 

That means every six years, $1 million decreases to $500,000.

If you also believe as I do, that we're going to continue to see inflation run at some high rate going forward, maybe not as high as the CPI rate of 8.5%. Maybe the Fed can get it down to 4 or 5%. Again, I think you have to double that, so now maybe it's 10%. That means every 7.2 years that $1 million dollar nest egg, or whatever yours is, is halved.

How do you keep up with that in an environment where the cost of everything continues to go up? 

And what if your investment strategy has been based on the long game of a financial advisor saying, “Well, we need to get you into bonds and get you into more conservative equities that are going to return you an average of 5 or 6%”?

In that case, you're still not breaking even. You're still going backward in time. That's not going to be sufficient for you to have the lifestyle you were depending on after all the hard work and years you put into your practice, your business, saving hard and putting money into the stock market 401(k)s.

Today, more than ever, you've got to be your own financial advocate. 

You have got to be in the forefront of determining how your money is invested. You've been good at making money all your life but maintaining it and having that money work for you is something that most people don't spend any time on “because there isn't time.” 

And besides, everybody says, “You can't do it yourself. Let the professionals take over.” But “professionals” haven't seen the markets that we're going through right now.

You've got to be on the forefront of what you're doing with your money. It’s what we do in Freedom Founders. 

We bring the best of the best of alternative investments and then have the collective wisdom of the community that slices and dices, and underwrites, and does the due diligence to determine how we go forward with our money.

I've been doing this for over four decades. I've gone through the cycles. I know how real estate works. If you've got a better plan, go for it. But understand: You need to have a plan.

(I also wrote an entire book about inflation, it's impact on your finances, and how you can beat it. You can order a copy for yourself here).

Without a plan, you're abdicating your financial future to folly. In other words, you don't know where it's going to land. I know that's not what you signed up for.

To your freedom!

– David

P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think):

1. Schedule a Call with My Team:

If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest.

2. Become a Full-Cycle Investor:

There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor, who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when the inevitable recession hits? Get your free report here.

3. Get Your Free Retirement Scorecard:

Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3-minute assessment and get your scorecard.

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