In the past it was entirely possible to earn a much higher rate of return in T-bills than the inflation rate. This was a long long time ago though. Today things have changed and we must consider the effects of inflation of our 'purchasing power.' Wikipedia defines 'purchasing power' as:

'Purchasing power is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat currency like US dollars which are the world reserve currency[citation needed]. As Adam Smith noted, having money gives one the ability to "command" others' labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for money or currency.'

I like to think of the concept as being what I am able to buy after inflation takes a silent bite out of my earnings. As an example let's think about the number of things we could have done in 1945 with $10,000. The mind could go wild with the possibilities as a person could have even bought a modest home with that amount. Today we cannot even fathom the concept of buying a home for $10,000! One thing I have discovered in my studies is that at an average rate of 4% the value of my hard earned dollars is reduced by at least half each decade that I live. This would be an average rate because a lot of things have prices which rise faster (exg. health care) and will cut the value of my dollars even greater that 50%. What does this do with our building an investment portfolio to prepare for retirement or some other long term goal? Well if we are planning to live for more than ten years (and you can bet that I am) that the vehicles that we choose to plant our hard earned dollars into better have a rate of return that grows fast enough to overcome the effects of inflation. The title of this blog is 'The Dangers of Fixed Income Investments.' A lot of people who read this might wonder how any 'fixed income' investment could ever be dangerous. In my mind they are dangerous simply because of the fact that they do not rise with inflation. With this in mind I would even dare to say that a bond is actually an even riskier investment than a stock if we are investing for the long term because it cannot increase in value. In fact I would even go so far as to say that the only useful means I have actually found for fixed income investments is in using them as a parking lot. If we have money that will be needed in less than five years then we need to be thinking about preserving the money that we have worked hard to get into our hands. Other than serving as a parking lot for short term needs they are something we will need to steer clear of if we are investing for the long term. I will talk about these things more in future blogs but let me finish with a few last thoughts. History teaches us that for any long term investor stocks will be the best bet. Stocks are investments which will grow over a period of time. Fixed income investments are parking spots where our principle is safe and where our return is fixed.