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  Tuesday November 21, 2017

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THE EFFECT OF INFLATION ON STOCKS
Learn even more about this topic with the Encyclopedia of Personal Finance™

Unlike the fixed coupon rate on bonds, the rate of return on stocks is highly variable. The return on a given stock is impacted by a variety of factors. Because stock returns vary to such an extent, it is not easy to measure the impact inflation has on them. Recently, however, some empirical evidence has demonstrated a link between inflation and a stock's total return: when inflation increased, the real rate of return on stocks has tended to decrease.

According to market watchers such as Ibbotson Associates, stocks have outpaced inflation in the United States for the study period 1926–2000.  However, the reason that stocks have outpaced inflation is because of the significant risks inherent in stock investments, and their potential rewards. However, not every stock has performed as well as the market, and not every stock that rises provides a rate of return higher than inflation. Past performance does not guarantee future results.

As detrimental as inflation can be to your investment returns, there are ways to beat it. In our next section, we will discuss some effective hedges against inflation risk.




LEARN EVEN MORE WITH THE ENCYCLOPEDIA OF PERSONAL FINANCE. CLICK HERE!

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