Understanding Inflation is Important to Investing Success
October 21, 2021
Should investors worry they may receive poor stock market returns if inflation rates rise?
Historically, that has not been the case.
Assume the stock market gained 10 per cent during a year that inflation was three per cent.
The first three per cent of return is needed to account for inflation. An investor needs to recover the three per cent of purchasing power that was eroded during the year.
In this example the after inflation “real” return to the investor was seven per cent.
Since 1926, the US stock market has posted an average annual after inflation “real” return of 7.3 per cent.
More recently, the S&P 500 index had positive returns after adjusting for the impact of inflation 23 out of the last 30 years.
The biggest fear for investors is running out of money. A large contributing factor to running out of money is how expensive things are.
Understanding how to navigate your portfolio during times of inflation is key. That comes down to evaluating your financial objectives, understanding your circumstances and deciding how to allocate your investments between stocks and bonds.
Historically stocks have had significantly higher returns than bonds. Stocks also have a higher risk and some years you should expect to lose money.
Bonds have less short-term risk. Long-term bond returns have historically been significantly lower than stocks.
Inflation is an important consideration. We recommend understanding its implication on both your investments and your ability to meet your financial objectives.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments – www.watsoninvestments.com