Purchasing Power
Definition
Purchasing power refers to the value of money in terms of the quantity of goods or services it can buy. When prices rise due to inflation, purchasing power decreases, each unit of currency buys less than it did before. Conversely, if prices fall (deflation), purchasing power increases.
It's a core concept in understanding the real value of money over time and how inflation erodes wealth.
Why It Matters to Investors
- Inflation reduces the real value of investment returns
- Preserving purchasing power is key to long-term financial security
- Assets like stocks, real estate, and inflation-protected bonds aim to outpace inflation
- Cash and fixed-income investments may lose real value over time
- Real (inflation-adjusted) returns give a truer picture of portfolio performance
The TiltFolio View
Both TiltFolio systems are designed not just to grow capital, but to preserve and increase purchasing power over time. TiltFolio Adaptive's trend-following system seeks to rotate into asset classes that are rising in real terms, avoiding those that are losing value due to inflation or market stress. TiltFolio Balanced maintains its diversified allocation (50% bonds, 30% stocks, 20% gold) to provide consistent exposure to assets that historically preserve purchasing power.
For example, when inflation is high and eroding the value of cash or bonds, TiltFolio Adaptive may favor assets like gold if they show strong price momentum. TiltFolio Balanced includes gold (GLD) as a permanent 20% allocation to provide consistent inflation hedging. Conversely, in deflationary periods, high-quality bonds often preserve purchasing power better than equities, which both systems can benefit from.
By adjusting dynamically to shifting macro conditions, TiltFolio Adaptive aims to protect against both nominal drawdowns and real losses caused by inflation. TiltFolio Balanced provides consistent protection through its diversified allocation, including gold as a permanent hedge against purchasing power erosion.
Real-World Application
• A retiree holding cash in a bank account sees their purchasing power decline as inflation rises
• An investor uses TIPS (Treasury Inflation-Protected Securities) to hedge against inflation
• A portfolio overweight equities and real assets during an inflationary boom helps preserve purchasing power
• A trend-following strategy exits bonds during inflationary drawdowns to avoid real losses