The Hidden Tax
Nobel Laureate economist Milton Friedman famously suggested that inflation can be thought of as a hidden tax.
As we draw to a close for the year, 2022 has been eventful to say the least. One of the key themes that defined the year has been high inflation —something foreign to many investors over the past 2 decades. To draw a parallel to present, we look back at the last regime of high inflation and see how investors fared during that period.
This period from 1966-1982 for the S&P 500 (first table) shows us that an investor who invested over that period of 17 years made no returns after adjusting for inflation. When we invest in the market, we expect to earn a premium for taking the risk, which not only allows us to beat inflation but also to grow our wealth. So is this something we should expect going forward? Perhaps not.
The US Adjusted Market 1 Index (second table) is representative of how we manage client portfolios that are geographically invested in the U.S. Generally, the portfolios will have a greater emphasis and tilts to companies that exhibit the value, smaller market capitalisation, and profitability factors. This strategy would have provided a total return of 322.22% over those 17 years, annualising 8.99% per year and outpacing inflation by 2.05% per year.
During periods of high inflation, systematically targeting securities that have a higher expected return within the eligible universe would pay dividends (pun intended). The strategy is able to both preserve value and grow, even during periods of high inflation.
We have written extensively on the topic of inflation and we previously wrote on the effects of inflation on various investments that you can read here.
If you have questions such as:
I don’t know if my investment portfolio is suitably positioned should the high inflation regime continue for a prolonged period
Should I invest in gold and commodities to preserve the value of my portfolio?
How should I invest for 2023?
Click here to schedule a 30-minute pre-discovery session where we can have a chat with you and see if we are able to add value to your concerns.