By John Spitzer, Ph.D. and Todd Houge, Ph.D., CFA
For the long-term investor, even a modest level of unanticipated inflation can be devastating. To illustrate the magnitude of the problem, consider an investor in the 32% tax bracket (combined Federal and State) who invests $10,000 for 10 years. The security guarantees a 5% annual yield. In 10 years, the investment will be worth $16,289 [$10,000 x (1+.05)10]. But if inflation is 3%, the investment will only be worth $12,121 in today’s dollars [$16,289 / (1+.03)10] And, if the gains are subject to tax each year, the investor will only have $10,395 in today’s dollars [$10,000 x (1+.034)10 / (1+.03)10]. This amount is only $395 more than the original investment, representing an annual return of less than 0.4%!
As the illustrati...
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