It’s funny to think that whenever we watch or read the financial news, we never find ourselves moving from a storm (or crisis) into calm open waters. Instead, we find the media bouncing around from one crisis to the next always holding a black cloud over the equity markets. As they prognosticate that this predicament is going to be the one that sends the markets into the abyss.
If you don’t believe me, just look at the last 16 months and the events that were (or still are) receiving major headlines that were supposedly going to tank the markets for the foreseeable future.
- Global Economic Devastation
- The Election
- Reddit/Robinhood/Gamestop (Meme Stocks)
However, through most of these major events, the markets are reaching new all-time highs. I am not saying that we did not see pull backs in the markets, we absolutely did (and historically always will), most notably the one being in March 2020. The reality: what the media portrays of each crisis as the end of the world, historically has no effect of what the equity markets do long term.
Now that we are starting to get back to some sort of normal following the above crises, what does the media do?
Come up with the next big catastrophic headline. And what may that be?
Drum roll please…Inflation!
Not just pushing the dread of inflation, but hyperinflation (the extreme increase in general prices).
So how does one protect themselves from inflation? The short answer, historically, is equities.
This may surprise many people as it is a countercultural way of thinking. It goes against what you may have read or heard from the financial media – which is to move to “safer investments” (Bonds, Commodities, Gold...) during inflationary times.
Historically, to get the greatest real return (return over inflation) on your monies, you are best to be invested in equities. Period. Don’t believe me?
Let us take a look at the historical numbers. With inflation growing at approximately 3% annually, the long-term annualized real returns (with dividends re-invested) over the last nine decades (since 1926) have been1:
- Large Company Stocks: 7%
- Small Company Stocks:9%
- Corporate Bonds: 3%
- Government Bonds: 2%
In fact, the worst real return for equities over any 20-year period going back to 1802 has NEVER been negative.
Yes, you read that correctly. NEVER.
My proof? Just look at the chart below which shows the highs and lows for stocks (blue), bonds (teal) and T-bills (grey), over the course of the specific holding periods. For example, over any ten (10) year period the best stocks have provided per year was up 16.8% and off 4.1% and T-Bills were up 11.6% and off 5.1%. Now take a look at the thirty (30) year results – fairly impressive inflation fighter for equities.
Just think about that for a moment. Through all the frantic headlines that the financial media have given the investing public, the equity markets have thrived. It is no different in times of increased inflation.
In the short-term will the markets dip? Of course (as they historically do every year) - and the cause is likely unknown. Meaning it can never be consistently predicted – no matter what the media is saying.
So the best way to protect yourself from inflationary times in the market is to be invested in equities. However, just being invested in equities may not be enough. Along with your investments you must have a long-term financial plan to keep you on track through all the crisis’s the media has to throw at you.
- Siegel, Jeremy, Stocks for the Long Run (2014), With Updates to 2019
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