The myth
Inflation is the level at which the prices of goods and services goes up. It reduces your money’s value over time and is the reason why your P500 will be able to buy less in the future than it does now.
This constant erosion of buying power is why some people believe that you should invest to beat inflation.
Why do people believe it?
The effects of inflation are felt by people in all locations and parts of society. Whether you’re buying groceries, a car, or a tube of toothpaste, inflation has a direct impact on how much you’ll pay now and in the future.
Once you know that inflation is responsible for rising prices, you’ll probably look for ways to make your money grow at a rate higher than it. That way, your buying power will remain at a constant level even after several years.
Risks of believing this myth
While investing to beat inflation is a good goal, it may not be the only reason for you to invest.
Before you decide, have a look at your other financial goals. You may find that merely trying to beat the inflation rate wouldn’t be enough for you to reach the amount you want by the time you need it.
You could think of investing to beat inflation as your benchmark, or the lowest rate that your money should grow. Then, set a higher target growth rate according to how much you need and when you must have it.
Verdict: It depends.
Growing your investment faster than inflation rises is always a good thing, because that will help preserve the value of your money over time. However, beating inflation might not be the only way for you to measure success.
If you’re investing to have enough money to open a business, for example, the rate at which your investment will have to grow will be determined by the money you have, the amount you want to gain, and the time left before you start operations.
In this situation, it would be possible for an investment product to grow at a rate faster than inflation, but still not fast enough for you to achieve your goal of having enough capital for the business. That's why using the inflation rate as your basis probably isn't the right decision.
However, if your goal is to preserve the purchasing power of your money in the future, then aiming for a growth rate that is higher than the inflation rate is the right way to go.
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