Inflation influence

Inflation. There is so many articles written about inflation, explaining benefits and downsides of it. 

What does it mean for an investor?  Part of the budgeting is  not only see how are you doing now and where the money goes to, but to have vision how to get from A to B.

Using my portfolio I will demonstrate clearly how does it mean an additional 10 (ten) years of work. The prospects and planning without taking inflation into account are rosy and glamour:

 

This means, that should I keep my contributions at $40 K a year, I will reach my target of financial Independence ($60 K a year from my investments at 3% interest) between 2033 and 2042, depending on the stock market performance.

My emergency fund and precious metals are not contributing towards growth - I use interest rate for the savings account at the inflation rate. It does not exactly right, but it simplifies.

This is a bit disappointing but let's have a look at the inflation adjusted scenario:

Diversification 2012

My current and future asset allocation is represented in the following table:

It seems that I am overexposed to cash. I know that the stock markets all over the world are mostly disappointing and not encouraging at all.Quite frankly the only incentive to invest in stock market is that interest on savings accounts (deposits) at the banks very low. The most I could get out of mine is 2,5% gross annually. This does not even cover inflation.

This is what I want to do at the begging of next year - to re-balance my portfolio in terms of cash and various currencies.   Portfolio diversification:

October 2011 update ($ 156,000 , +$ 9,000 (+7.6%))

My goal for this year was to accumulate $40 K USD a year and invest them.  

 I will be concentrating on stocks (mutual funds).  Yes, ideally I should do in small increments, every month. So I will do a one off lump sum transfer next year and then in equal  portions afterwards.

Observations: