Quote:
Originally Posted by TheMidnightNarwhal
What do you mean.
If you bought a lot of bricks when bricks were invented at 1$ and were able to sell your bricks after a year for like 3$. The bricks made you money.
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Not if inflation caused $3 to be worth less than $1 a year later. You would have lost money. You have to present value the future cash flows. Of course, in your scenario, you estimated a 200% APY, which is completely unrealistic.
A more accurate scenario would be as follows:
In 2008, you buy something worth $100 for $100. Ten years later, in 2018, you sell that item for $125. Did you make a profit? Let's see. The discount rate for those ten years is about 2.2% (see below).
2008 3.8%
2009 1.4%
2010 1.6%
2011 3.2%
2012 2.4%
2013 2.6%
2014 1.7%
2015 1.0%
2016 1.3%
2017 2.4%
2018 2.9%
Average: 2.2%
So, if you take the value each year and multiply it by the reciprocal of the discount rate, compounded annually, 100 x (1+3.8%) = 103.80, then 103.80 x (1+1.4%) = 105.25, etc - you end up with a FV of $127.13. That means that $127 today would be equal to $100 in 2008. Since your original investment is now worth $125, it is worth less than $100 in 2018 dollars, so your investment lost money when adjusted for inflation. This investment example was an ineffective hedge.