Without careful planning someone investing $10,000 in 2001 could be making a mistake that costs them hundreds of thousands of dollars in years to come. Combined with the effects of inflation, underperforming assets can erode the purchasing power of retirees, destroy college investment strategies, and eliminate hopes for early retirements.

Underperforming assets can be defined as those that, after inflation and taxes, provide very small or non-existent yields. In today's market, many short-term fixed income securities such as Treasury Bills and CDs fall into this category.

To avoid the loss of purchasing power, investments for the long term must provide capital growth, while at the same time beating inflation and taxation.  When devising a strategy that protects purchasing power, it's extremely important to note that over the long run, even small differences in various investment yields can have a significant financial impact. In fact, underperforming investments which are not yielding maximum return for the level of risk involved can cost even the moderate investor tens of thousands of dollars over the long haul.

For example, an investor who put $10,000 in 6-month CDs in 1980 saw an average annual yield of 8.09% by the end of 1996. At the end of 1996, that nest egg would have been worth about $37,245. If the same investment had been made in companies making up the Standard and Poor's 500, the return would have been 16.24%, or $129,201, almost 3.5 times more than the return on the CD investment.

Over the past 30 years, the Standard and Poor's 500 index has usually offered better returns than CDs and other fixed-income securities. Of course, to get that return, investors had to take more risk. Because of the risk involved, many investors have traditionally believed that preserving capital should be their main objective as they reach retirement. As a result, they arrange for very conservative investments.  This is a sound strategy, to a certain degree, but a preoccupation with preserving capital may lead investors to lose sight of a more important goal. Instead of preserving capital, preserving spending power should be paramount. Let me put it this way: A $500,000 retirement account earning 8% would yield a comfortable $40,000 a year. But assuming a modest inflation rate of 4.5%, the income would buy only $27,000 worth of goods in 10 years, $17,000 in 20 years and only $11,000 in 30 years. And with today's increased longevity, it's entirely possible to have a 30-year period of retirement.

Certain short-term, fixed income instruments such as CDs, T-bills, money markets, and passbook savings accounts, for instance, generally are considered risk-free investments because they offer a guaranteed fixed rate of return. But from the examples I've listed, it is clear that there can be a risk in these investments. Because of the ravages of taxes and inflation, one risk is that, slowly but steadily, purchasing power will disappear.

Anyone who lived during the 1950's and 1960's understands the threat to purchasing power that inflation represents. During that time, Americans could purchase new automobiles in the $2,500 range, monthly electric bills were under $10, and annual auto insurance premiums were under $100. Those of you who don't go back that far only need to look at what items cost in 1970. Postage stamps were 6 cents, the Wall Street Journal was 15 cents, a Cadillac Sedan De Ville was $5,700, and a Super Bowl Ticket was $12. Think about what you have to pay for these items today. An annual average inflation rate of only 5% causes prices to almost triple every 20 years.

One of the best ways to outpace inflation is to have a portion of your assets invested in high-quality stocks. Many people believe that investing in stocks may be too risky when in fact it may be just the opposite. The real risk is the risk that you will outlive your money. The only investment that has consistently outpaced inflation over time is stocks. As long as you are properly diversified and you stick with high-quality investments you can ride out stock market cycles, and you increase your chances to outpace inflation.