Are you keeping up with inflation?

Anyone who makes a significant purchase will tell you a dollar doesn't go as far as it once did due to inflation - the rate at which prices rise. Inflation is something you should be concerned about, especially when you consider investments.

According to Morningstar, Inc., the annual inflation rate averaged 3.0% between 1926 – 2006*. For an investment to outpace inflation, your annual return would need to be greater, on average, than 3.0% provided this trend continues.

Historically, investments in stocks have produced returns greater than the rate of inflation. From 1926 -2006 stocks have posted compounded annual returns of 10.4% for Large Company Stocks* (as represented by the Standard & Poor’s 500® Index). Compare that to returns over the same period for bonds of 5.4% and 3.7% for Treasury Bills*.

Of course, investments in bonds and T-bills may be less risky than an investment in stocks, but generally the more risk you assume, the greater the potential for gain.

Unfortunately, it would be nearly impossible for an average investor to purchase a portfolio consisting of all the stocks, or equity securities, in a given index.

There are other investment opportunities that offer the potential to outpace inflation. Purchasing shares of a stock mutual fund is one way to start. With stock mutual funds, you can take advantage of a professionally managed, diversified portfolio. Some funds will concentrate on specific sectors of the stock market while others seek to mirror the performance of market indexes such as the S&P 500 or the Russell 2000® Index.

You may be concerned about the recent downward trends of the stock market, and you are not alone. Recent highs in the market have been replaced by troubling lows. There have been periods, such as in October 1987 and in the days following the September 11, 2001 terrorist attacks, when the market has lost significant value in a short period. However, if you look at long-term performance, stocks have historically  increased in value.

Riding out the lows is an important strategy when investing in stock mutual funds. Understand that prices fluctuate. Stock investments may not be the proper choice if you need the money in two to three years, but may be appropriate if you are years away from your goals. You might also consider a stock fund as part of an asset allocation program that includes shares of a bond or money market fund.

If you have questions about investments that may be right for you, contact your registered State Farm® agent. Of course there is no guarantee that the markets will continue to rise over time or that your investment will achieve its objective. Investment return and principal value will fluctuate and your investment, when redeemed, may be worth more or less than their original cost. Securities are not FDIC insured, are not guaranteed by State Farm Bank, and are subject to investment risk, including possible loss of principal.

An investment in the Money Market Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.  Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

*© 2007 Morningstar, Inc.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 260 KB) .

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