Purchasing Power Risk and Balanced Portfolio Construction

What this video covers

• Why a fixed-rate bond's nominal coupon payment staying the same masks the true risk: its shrinking constant-dollar (inflation-adjusted) value
• How fixed-income investments, including bonds and preferred stock, carry the greatest purchasing power risk because their payments are locked in nominal terms
• Why common stock generally carries less purchasing power risk, since earnings, dividends, and prices have the potential to rise with inflation over time
• The primary role of each balanced-portfolio component: bonds and preferred stock for downside protection, common stock for inflation-hedge potential
• Why a convertible security is the only single component that supplies both downside protection and an inflation hedge on its own
• The critical exam distinction that outside of convertibles, no single holding serves both goals, so a balanced mix across components is required
• Why an all-common-stock portfolio fails on downside protection even though it hedges inflation, and why an all-fixed-income portfolio fails on purchasing power risk even though it protects principal