{"id":1481,"date":"2021-05-27T16:48:50","date_gmt":"2021-05-27T20:48:50","guid":{"rendered":"https:\/\/thevoiceoflakewood.com\/?p=1481"},"modified":"2021-05-27T16:48:51","modified_gmt":"2021-05-27T20:48:51","slug":"inflation-and-investing","status":"publish","type":"post","link":"https:\/\/thevoiceoflakewood.com\/inflation-and-investing\/","title":{"rendered":"Inflation and Investing"},"content":{"rendered":"\n

Mrs. Steiner, a middle-aged almanah, had \u201cnechasim da\u2019agos.\u201d The life insurance payout she\u2019d received after her husband\u2019s petirah was still sitting in a cash account, earning nothing. While she\u2019d been too numb to think about this during the aveilus, it was time to face reality. That pot, which had to last until 120, wasn\u2019t even keeping up with inflation. And from the way the powers that be in Washington, DC, had been acting lately, it seemed probable that inflation would skyrocket. If so, was her cash in grave danger? How can investors prepare for potential runaway inflation?<\/strong><\/em><\/p>\n\n\n\n

Stagflation 2.0?<\/strong><\/p>\n\n\n\n

Money in the bank may seem super-secure, but if, over time due to inflation, your cash buys you less and less stuff, that\u2019s a loss of wealth. While inflation has been tame for decades, from 1972\u20131981 the US dollar lost almost half its value (see A1 in chart.). In 1980 alone, the value of the dollar fell by 14%! This \u201cGreat Inflation\u201d was a financially devastating time period\u2014which some fear we may be doomed to revisit soon. Let\u2019s review how various asset classes performed during America\u2019s most recent period of significant dollar erosion.<\/p>\n\n\n\n

Chart navigation<\/strong><\/p>\n\n\n\n

Line 1 on the chart lists annualized investment returns during the initial \u201cstagflation\u201d period, when inflation skyrocketed from 2% to over 14%. Line 2 showcases the next decade, when inflation was blunted and fell drastically (after interest rates were raised to double digits!). Line 5 encompasses the whole 20-year time period. Lines 3 and 4 are presented cumulatively and after<\/em> subtracting the effects of inflation (or what professionals call the \u201creal\u201d return). These two lines highlights how painful and volatile an inflationary environment was to investors. And the data as a whole points to some practical guidance for investing in the face of inflation.<\/p>\n\n\n\n

Cash is not too bad<\/strong><\/p>\n\n\n\n

Interestingly, cash (in this case, represented by money market funds) didn\u2019t do badly at all during the 1970s and 1980s despite the high inflation. Why? Rates paid by banks on liquid savings rose as quickly as inflation did, so savers earned double digits in the early 1980s! (Sounds like a dream, right?) As you can see (B1, B2 compared to A1, A2), cash yields surpassed inflation during that time period.<\/p>\n\n\n\n

Bonds were busted<\/strong><\/p>\n\n\n\n

Most bond investors, however, get rates that are locked in for years. Therefore, when inflation rises unexpectedly, the real (net of inflation) value of bonds plummets. Intermediate-length treasury bonds lost about 3% (real) per year between 1972 and 1981 (C1 minus A1). During the worst four-year stretch, the real loss was a whopping 28% (C4), not the type of loss conservative bond investors anticipate. On the other hand, when rates fell throughout the 1980s, a reverse effect occurred: bonds did surprisingly well, earning over 10% after inflation (C2 minus A2).<\/p>\n\n\n\n

Stocks had mixed results<\/strong><\/p>\n\n\n\n

Most businesses struggle with inflation\u2014costs of labor and raw materials often rise faster than the prices customers are willing to pay. The difference equals a hit to profits, and less profits usually translates into lower stock prices. The stock market managed to break even after inflation during a very volatile time period in the first half of our saga (D1 minus A1). But then it roared back to life, gaining a stellar 16.3% (D2) annually from 1982\u20131991! Those who stomached the entire span gained 11.9%, almost double the inflation bite (D5, D1).<\/p>\n\n\n\n

Real estate is pretty great<\/strong><\/p>\n\n\n\n

Real estate (as represented by REITs, or real estate mutual funds) also did quite well during the inflationary upheaval (E1, E2, E5). The value of land and bricks and mortar tends to grow with inflation, and landlords can raise rents accordingly. This is especially true for housing. Since a roof over a head is an unavoidable expense and residential contracts are relatively short-term, apartment owners are in a strong position to pass inflation increases on to their tenants. (We will revisit this in a future article, adding the perspective of personal homeownership.)<\/p>\n\n\n\n

Gold shines, then shatters<\/strong><\/p>\n\n\n\n

Many assume that gold is the ultimate inflation fighter, and indeed, it boomed at the outset of the 1970s (F1). But as inflation started receding, the price of gold collapsed. The loss of about 5% of the value of gold per year after inflation from 1982\u20131991 (F2, A2) put a real dent in its reputation as a reliable guarantor of asset values. It can still be a worthwhile portfolio diversifier in limited quantities.<\/p>\n\n\n\n

Commodities crushed it<\/strong><\/p>\n\n\n\n

It\u2019s easy to understand why commodities (basic raw materials like metals, fuels, and grains) were the top performers of the time period. Unlike gold, people must always keep purchasing commodities to survive. The prices of these raw materials rose dramatically during each of the two decades (G1, G2), while its falls, though stiff, were among the lowest of the bunch (G3, G4). Keep in mind, though, that like gold, commodity prices eventually collapsed too, when inflation did. Timing still matters, and getting it wrong can be extra costly within this unique investment category.<\/p>\n\n\n\n

Some intriguing takeaways<\/strong><\/p>\n\n\n\n

So what\u2019s the bottom line? First, cash did a lot better than I\u2019d have expected. Second, long-term<\/em>, all the categories beat inflation (line 5), though they did experience periods of significant losses (line 3)\u2014also surprising. Finally, assuming that historical precedents hold, a long-term, diversified investor may not have to fear inflation that much. Check out column H, which highlights a portfolio composed of 50% US stocks, 20% intermediate treasury bonds, and 10% each of REITs, gold, and commodities. This portfolio got very solid returns (H1, H2, H5) while experiencing much less volatility than the other categories (except cash, which has limited upside potential).<\/p>\n\n\n\n

Two important caveats<\/strong> But as investment advisers never fail to warn clients, past results don\u2019t guarantee future returns. The world has changed in many ways with the introduction of negative interest rates, cheap alternative energy, smartphones, the euro, and even bitcoin, as well as myriad other factors that impact inflation which didn\u2019t exist the last time around. The upcoming potential inflation spike may therefore unfold very differently. Another thing that didn\u2019t exist then is Treasury Inflation Protected Securities (TIPS), which are government bonds with inflation protection. I therefore couldn\u2019t chart their history for this analysis, but these complicated securities definitely belong in the inflation-fighting arsenal. Perhaps we\u2019ll follow up on this in a future column<\/p>\n","protected":false},"excerpt":{"rendered":"

Mrs. Steiner, a middle-aged almanah, had \u201cnechasim da\u2019agos.\u201d The life insurance payout she\u2019d received after her husband\u2019s petirah was still sitting in a cash account, earning nothing. While she\u2019d been too numb to think about this during the aveilus, it was time to face reality. That pot, which had to last until 120, wasn\u2019t even […]<\/p>\n","protected":false},"author":2,"featured_media":1482,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[11],"tags":[20],"acf":[],"_links":{"self":[{"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/posts\/1481"}],"collection":[{"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/comments?post=1481"}],"version-history":[{"count":0,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/posts\/1481\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/media\/1482"}],"wp:attachment":[{"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/media?parent=1481"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/categories?post=1481"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thevoiceoflakewood.com\/wp-json\/wp\/v2\/tags?post=1481"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}