I began to talk yesterday about asset allocation and used an illustration of a gambler betting on every horse in the race. The key to understanding my thoughts in this matter is to understand the environment that investors live in. A lot of people miss this key part of investing in their search for the 'hot' investment that will make them rich. It is important though for us to take a step back because the environment is a major part of any successful investment program. There are several key forces that will affect our investment program just as gravity affects everything and everyone on the earth. Just as it is impossible to ignore gravity so also is it impossible to ignore the environmental factors affecting any investment that we decide to put our hard earned dollars into. The first of these factors is inflation. As I have been reading and interviewing various people about investments I have been surprised to find very little people acknowledge this as a factor affecting the return we experience from our portfolios. It is important for us to take this into consideration because studies tell us that there have actually been only two years since World War II that have seen a decline in inflation. The average I have found is 4.10%. This means that if we obtain a 3% return then our investment has still lost because it is below the inflation rate. Do you see the problem with this? One problem with inflation that a lot of people miss is the fact that it will compound over time. In other words the price that we pay for our 'stuff' will increase each year and this will cause the value of our original investment dollar to decline. To simplify this concept - if the price of a pack of gum doubles over the lifetime doubles over the life of an investment and the amount you invested had been enough to buy a pack then that investment would have to double over its lifetime in order for us to buy a pack when we cash in. Inflation affects the price on everything we purchase. I remember buying gasoline for 62 cents when I first got my drivers license and now it is hard to find it for less than 2 dollars a gallon! The reason for the increase is inflation. Statistically a 4% inflation rate will cause the price of goods to double on an average of 18.1 years. This means that an investment with the goal of enabling us to retire at a decent age will have to gain more that 4% annually in order to keep us ahead of inflation. So as we seen then inflation is the first hurdle we are going to have to overcome in order to be successful in our investment program.