Will Inflation Hurt My Returns?
Inflation means being broke with a lot of money in your pocket
— Unknown
Many of us have begun to wonder whether inflation will eventually hurt our investment returns. In fact, recent articles and investment outlooks from Bloomberg to The Straits Times seem to suggest that the spectre of inflation is one to be worried about.
Investment managers have wasted no time in urging investors to “protect” their money from inflation with a slew of products that are supposed to help shield their assets from inflationary effects. Below are a couple of examples from DBS, Schroders, and the like.
Amidst such headlines, it is always prudent to look at the data. Remember, a diversified global stock portfolio has generally provided returns above inflation over decades. Holding such a portfolio ensures that your money keeps pace with inflation, preventing your spending power from diminishing in the future. This solution is also applicable to those of us who are concerned that rising prices will push our long-term financial goals further out of reach. Research and data from the 1990s to date shows no relationship between periods of high/low inflation and stock returns (shown in the chart below). There were both instances of poor returns when inflation was low and high returns when inflation trended upwards.
Another common assumption is that fixed income instruments, like bonds, are bad in a high inflation environment. While it may be true for some cases — especially if you are holding a portfolio made entirely out of bonds — if you are holding bonds within an asset allocation there is no reason to think that inflation may bring dire trouble. A study done on long-term inflation from the 1920s and the effects on various asset classes showed that many types of bonds beat inflation over those 47 years, which included double-digit inflation in the 1940s and 1970s. The table below breaks down the return of bonds during such environments. Of note are the real returns (where inflation has been taken into account) which shows that most bond investments except the very short term money market type, have provided a positive return above inflation.
Whether there is high or low inflation your investments should always be matched to your individual goals and desired outcomes. Investing isn’t a one-size-fits-all game. Creating a plan and allowing a fiduciary advisor to walk you through it can be extremely valuable and liberating. If you feel that you need a portfolio checkup or more information, come speak to us.
