Recent data has shown that inflation is alive and well. However, the extent to which inflation will subsist, both in terms of severity and duration, is debatable. Some economists believe it will persist while others believe it is simply transitory.
The time horizons for transitory inflation versus persistent are subjective. How long is transitory? For one investor it may be a few months, to another transitory inflation could last a few years or more. It really all depends on one’s time horizon.
But rather than speculate on inflation, which like the market, no one can predict, it may be wiser to focus on learning from past bouts of inflation. We have a few good examples.
In the 1940’s inflation spiked significantly, with the rate increasing to 15% at one point and north of 17% at another point. Both were temporary (transitory), but painful, nonetheless. So how did stocks do during this inflationary decade? Very well! The S&P 500 had average annual returns of 9.2% that decade.
The 1970’s also experienced two inflation spikes and had the highest average inflation rate at 7.4%. Remember your first mortgage rate (or your parents mortgage)? Even so, the market produced positive annual returns through the decade.
So, this is what I have learned from studying past inflationary periods. Stocks that can increase prices of goods or services tend to do very well during inflation. Real estate where landlords can raise rents also perform well. Lastly, commodities like gold, silver and farmland crops may also increase in value. All of these investment areas we have made slight adjustments to your portfolio. Over the last year we have shifted some of your allocations to increase your weighting in these historically positive inflationary assets.
It is important to note that the most important part of your plan is just that, sticking to your plan. That is why it is best to ensure that your financial decisions are based on your individual investment plan, irrespective of the concern or fear du jour. Today it is “Inflation” and we have made necessary adjustments. In the future it will be something else and I can’t wait to see what the future brings. Until then, your loaf of bread, milk and gas may cost a little more.
©2021 The Behavioral Finance Network