A risk that is often forgotten by cautious investors is inflation risk. This is the risk that you will lose wealth because you are invested in something that appreciates at a rate slower than inflation can depreciate it. Although the returns of cash investments and other low volatility strategies seem quite safe, if you take out tax and then correct for inflation you will find that your investment is not doing well at all.

Remember that money is always losing its value as governments print more of it (though it would be simplistic to say that printing cash is the root of all inflation). The term "millionaire" has a ring about it that still conjures images of vast opulent mansions. These days there are dozens of little old ladies on pensions that live in little houses in nice parts of town that own a million dollars worth of property, it is no big deal any more. Why? Well 50 years ago the term millionaire applied to a super wealthy elite, these days a million dollars doesn't buy all that much any more, in fact you could spend it all on one nice house and a European sports car. Even this term has lost its zing, these days if you want to impress people you need to be a billionaire. What kind of world has millionaires living on an aged pension? A world where inflation exists.

Some day we will all have to be millionaires, in fact if you want a decent retirement on an income of about $40,000 then you will HAVE to be one, that is approximately how much super you need to aim to amass in order to live from 65 to 80 on a decent income. You won't get that if you get too conservative too early on. The price of forgetting inflation risk is a miserable old age being forced to eat cat food (or cats, which would be preferable).

The following chart shows the Consumer Price Index (CPI) since the 60s. The more volatile line below it is a rate of change, showing the rate at which inflation has surged and abated over this time. If your investments haven't moved faster than the CPI, you have lost money.