Stocks as Hedge Against Inflation

[mitchjav]

Was reading an article in the local paper today (syndicated column written by Terry Savage) that says "Stocks have always been a good hedge against inflation - over the long run...... Keeping some cash on the sidlines risks the impact of inflation. Still, if you need cash for living expenses, it might be worth taking the inflation hit to have some immediate liquidity..."

Sounds like she's saying stocks for long-term money, cash for immediate needs ... same as in non-inflationary times Guess I don't get the point Should we do anything different with our portfolio now that inflation is rising?

 

[youbet]

https://www.terrysavage.com/inflation-a-special-report/

Stocks have always been a good hedge against inflation—over the long run. In fact, according to Ibbotson market historians, there has never been a 2—year period in the last 100 years where stocks didn’t outperform inflation. But those periods included deep market declines. Those close to retirement might panic if they need to withdraw money from their retirement accounts in a temporary market decline, perhaps caused by higher interest rates.

Keeping some cash on the sidelines creates an obvious risk. Buying power of cash is destroyed by inflation – unless interest rates keep up. And that’s not happening, since the system is so flooded with liquidity that banks have no incentive to raise rates and attract deposits. With the inflation uncertainty, banks are reluctant to lend.

 

[Al in Ohio]

Was reading an article in the local paper today (syndicated column written by Terry Savage) that says "Stocks have always been a good hedge against inflation - over the long run...... Keeping some cash on the sidlines risks the impact of inflation. Still, if you need cash for living expenses, it might be worth taking the inflation hit to have some immediate liquidity..."



Sounds like she's saying stocks for long-term money, cash for immediate needs ... same as in non-inflationary times Guess I don't get the point Should we do anything different with our portfolio now that inflation is rising?

This is elementary my dear.

 

[RobbieB]

Keeping equities at 80% and living off them quite nicely -

 

[razztazz]

As long as they keep saying "long term" they can get away with anything. You will also need "long terms" of cash on hand to continue to eat in the manner to which you have become accustomed. Inflation of any magnitude is known and discussed around here always as bad for eatin' money. All the significant RE failures were caused by inflation. Inflation->stocks ->bad. "Eventually" there's a much counted on happy ending but stocks are not an inflation hedge.

 

[mitchjav]

This is elementary my dear.

not helpful

 

[corn18]

Well, there has never been a 30 year period where stocks returned less than 4.41% average real return. There have been 30 year periods where bonds have had negative real returns.

So, if you are a long term investor, history shows that stocks are a good inflation hedge.

This has a lot of lines, but shows 30 year rolling average returns for various things. The portfolio is 60/40 unless otherwise noted.

 

[FREE866]

Keeping equities at 80% and living off them quite nicely -

What do you keep the remaining 20% in? Just curious


I'm close to 100% equity and have been for years. Not that I think we are set to have a big bad 50% crash, but sometimes think I should lighten up a tad

 

[explanade]

Can companies maintain or expand profit margins in this environment?

Or can there be an inflationary spiral which prevents sustaining margins?

Do all large companies have pric8ng power or only a relative few?

 

[Koolau]

Was reading an article in the local paper today (syndicated column written by Terry Savage) that says "Stocks have always been a good hedge against inflation - over the long run...... Keeping some cash on the sidlines risks the impact of inflation. Still, if you need cash for living expenses, it might be worth taking the inflation hit to have some immediate liquidity..."

Sounds like she's saying stocks for long-term money, cash for immediate needs ... same as in non-inflationary times Guess I don't get the point Should we do anything different with our portfolio now that inflation is rising?

In theory, we all set up our portfolios knowing that stuff happens. Stocks occasionally tank - sometimes for a few years. Bonds go down when interest rates rise. Recessions are inevitable. Inflation is either with us or will be (now it's with us.) "Fixing" a portfolio when its under stress is probably ill advised in most cases. The time for fixing is when things are more or less stable.

We set up our portfolios so that we won't have to dip into something that's currently losing value (usually, by having some cash on the side.) SO, yes, it should work in good times and bad, inflation or deflation. Does that mean we're all comfortable and don't flail about a bit when (say) inflation rears its ugly rear? Of course not. I'm a bit spooked by this inflation, but my AA has sustained me through the great recession - not to mention the early 00s tech bubble-burst. If my AA doesn't sustain me through this inflation, I'll make adjustments (implement back-ups, maybe back-ups to my back-ups.)

Having said all that, lots of us are doing our dribble of I-bonds (pretty much the only game in town right now.) Some are buying on the dips (probably their typical MO anyway.) Other folks are already beginning to cut back on spending.

I think the answer is, we'll know exactly how to deal with this particular crisis - once we are through it and not before. Stay the course has become my suggestion of late. It's not for everyone so YMMV.

 

[corn18]

In theory, we all set up our portfolios knowing that stuff happens. Stocks occasionally tank - sometimes for a few years. Bonds go down when interest rates rise. Recessions are inevitable. Inflation is either with us or will be (now it's with us.) "Fixing" a portfolio when its under stress is probably ill advised in most cases. The time for fixing is when things are more or less stable.

We set up our portfolios so that we won't have to dip into something that's currently losing value (usually, by having some cash on the side.) SO, yes, it should work in good times and bad, inflation or deflation. Does that mean we're all comfortable and don't flail about a bit when (say) inflation rears its ugly rear? Of course not. I'm a bit spooked by this inflation, but my AA has sustained me through the great recession - not to mention the early 00s tech bubble-burst. If my AA doesn't sustain me through this inflation, I'll make adjustments (implement back-ups, maybe back-ups to my back-ups.)

Having said all that, lots of us are doing our dribble of I-bonds (pretty much the only game in town right now.) Some are buying on the dips (probably their typical MO anyway.) Other folks are already beginning to cut back on spending.

I think the answer is, we'll know exactly how to deal with this particular crisis - once we are through it and not before. Stay the course has become my suggestion of late. It's not for everyone so YMMV.

I think stay the course is the best advice. Short term stress on a portfolio is disconcerting, but is the worst time to make big changes. I am a 60/40 guy and there are times where a 60/40 portfolio can be frustrating. But over longer periods, it does well.