The market is dropping like a stone and you are pretty nervous. Should you get out?
Maybe not, says the American Funds Group of mutual funds. "The most pressing danger investors face over the years is not fluctuating securities prices or even economic uncertainty," it says. "It's inflation." Many investors stopped paying attention to inflation in the 1980s when double-digit inflation rates disappeared. But even a relatively low rate of 5 percent a year -- less than we will have this year -- can reduce the purchasing power of your money by 40 percent over 10 years, American Funds says.
Putting money into "safe" investments offers no protection from inflation, says Graham Holloway, an American spokesman. "Over the long term, money squirreled away in CDs and money funds can't keep pace," he says. "They are designed for stability of principal and provide short-term solutions. But inflation is a long-term problem." Safe Treasury bills have not beaten inflation over the past 20 years, while stocks have done so by a comfortable margin, he says.