A11

David Konning

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When saving for retirement, cash and fixed-income securities are important for the secure, stable returns they provide. However, due to the effects of inflation, it's also important to include the right amount of exposure to equities in your portfolio to help you meet your long-term goals.

Although equities fluctuate in value from day to day, they can help preserve your portfolio's purchasing power over time, since they have historically provided a rate of return which outpaces inflation.

Why? Because cash and fixed-income assets are vulnerable to inflation risk. Equities, although they can experience short-term volatility, have historically provided the growth needed to offset inflation and preserve your portfolio's purchasing power.

With recent inflation rates hovering around 2.2% annually, many investors may tend to overlook inflation-related risk. But you only need to look at historical price increases to understand how inflation can eat into your savings over time.

Gas prices have doubled over the past 20 years. A letter that cost 5 cents to mail in 1970 now costs more than 50 cents. And in the 1970s, you could buy a house for $15,000. The bottom line is that the goods and services you enjoy today will cost more by the time you retire.

And their prices are likely to continue rising over the course of your retirement. This makes protecting your investments against inflation even more important.

So how can you protect your retirement savings from the erosion that inflation causes? Including the appropriate amount of equities within your portfolio can help you stay ahead of inflation over time. Historically, the return on equities has consistently outpaced the rate of inflation.

The growth potential that equities offer can help to offset the impact of inflation and preserve the purchasing power within your portfolio. While GICs and bonds are an important part of a well-diversified portfolio, allocating too much to these types of conservative investments may allow inflation to catch up with you over time. But putting too much of your portfolio into equities may lead to greater fluctuations than you might be comfortable with.

Note: The material in this column is intended as a general source of information only and should not be construed as offering specific tax or investment advice. Individuals should consult with their personal tax advisor, accountant or legal professional before taking any action based upon the information contained in this column.

* David Konning is an investment and retirement planner at Royal Bank. He can be reached at David.Konning@rbc.com or by phone at 856-0406.