Understanding Inflation Your Investments May Not Be Growing as Much as You Think Inflation — the increase in the price of goods and services — can wreak havoc on a long-term investor's money. Unless your returns keep pace with inflation, your money's value erodes. An investment, then, should be evaluated not only for its return before inflation (nominal return) but also for its return after inflation (real return). Nominal vs. Real Returns Consider the nominal and real returns of three major asset classes found in most retirement savings plans: cash-type investments, bonds, and U.S. stocks.   A dollar invested in Treasury bills between 1928 and 1996 earned a 3.9% average annual return. Yet, according to the U.S. Consumer Price Index, inflation during that same period averaged 3.3%. The T-bills' real return? Only 0.6%. A dollar invested in long-term U.S. government and corporate bonds over the same period earned a 5.7% average annual return. Less inflation, the real return is 2.4%. Better than T-bills, but not by much. A dollar invested in U.S. common stocks over this period generated a 12.4% average annual return. The real return: 9.1%. That's three times better than bonds and head and shoulders above T-bills. Your Personal Bottom Line Most discussions of investment performance focus on nominal returns. Yet your personal "bottom line" is how your investments perform after inflation is backed out. How would you react if you were told your $1-million nest egg will only buy what $200,000 does today? The lesson to be learned is stocks, based on their history, can potentially produce better returns above inflation compared to fixed-income investments. So how concerned should you be about real returns? That depends in part on your retirement investment goal. Real returns take on greater meaning if you're a long-term investor. The longer you have to invest, the more time inflation has to impact the return on your investment. Higher real returns put more money in your account to counteract inflation. Real returns may be less of an issue if you've accumulated most of your nest egg and will soon start spending it. In this case, inflation has less time to erode your money's value. Still, it's probably a good idea to keep some of your money invested with the goal to achieve above-inflation growth. Retirement can last 20 years or more, and you don't want your savings to run short. Consider investments with real returns that keep pace with or are slightly ahead of inflation. Fund objectives, risks, charges, and expenses should be carefully considered before investing. A prospectus containing this and other important information can be obtained by calling (866) 676-7680 or by visiting this page on russell.com. Please read the prospectus carefully before investing. Copyright © Russell Investments 2005. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Past performance is not indicative of future results. Bond investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Greater risk is inherent in portfolios that invest primarily in high yield bonds. They are subject to additional risks, such as limited liquidity and increased volatility. Treasury Bills (.T-bills.) are short-term debt securities issued by the U.S. Government with maturities of usually one year or less. Fixed income investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Inflation may not maintain an even rate and may be more or less than the percentage indicated. Nominal return — sometimes used to differentiate between the earnings or yield on an investment (nominal return) and the 'real' earnings/yield. It is the return in simple monetary terms with no allowance for the effects of inflation on the value of the return. Real return — The rate of return on an investment — or any income plus or minus any change in value — minus the rate of inflation gives you a real rate of return. The consumer price index (CPI) is a monthly gauge of inflation that measures changes in the prices of basic goods and services, such as housing, food, clothing, transportation, medical care, and education. Compiled monthly by the U.S. Bureau of Labor Statistics, the CPI — often incorrectly referred to as the cost-of-living index — is used as a benchmark for making adjustments in Social Security payments, wages, pensions, and tax brackets to keep them in tune with the buying power of the dollar. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. Securities products and services offered through Russell Financial Services, Inc. (formerly Russell Fund Distributors, Inc.), member FINRA, part of Russell Investments. For information on the Financial Industry Regulatory Authority, go to www.finra.org. RFD 05-5583. First used: November 2005.			RELATED Articles Stocks & Bonds Developing Your Investment Strategy   Why Invest WITH RUSSELL? Learn more about Russell's diversification-rich investment approach and what it can do for you.   Expert INSIGHTS   Printer friendly version of this page Send feedback or comments Site Search

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