Inflation represents an external impact upon future returns. Purchasing power decreases in times of inflation.
When an investor considers future returns of his or her portfolio, it is critical to consider inflation and build this variable into their analysis. In many cases, the impact can be significant especially in terms of retirement portfolios where the time horizon can be 10, 20 or more years.
Taxes represent another variable to consider for investors. Depending on the investment, taxes are either paid upfront (i.e. IRA) or upon withdrawals (i.e.401K). External impacts such as taxes and inflation can prevent any investments from being considered ‘riskless’.
Are there any other external impacts an investor should consider?
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