Press "Enter" to skip to content

Diversified stock fund is best long-term inflation hedge

We live in dollars, spend in dollars and make financial plans in dollars. But what will your dollars be worth in the future, when you plan on spending them? That’s not an idle question, even though we have few alternatives to using dollars for all our plans.

Anyone over 40 can tell a story about how “cheap” things were in the past. Median home prices, for instance, have risen dramatically over time. In 1975, the median home price was $40,700. In 2017, the median home cost $335,400.

Some prices have fallen, especially for consumer goods such as televisions and laptops. But do you want to bet your retirement lifestyle on lower prices?

The impact of even a little inflation can be devastating. Think about this: At an annual inflation rate of only 3 percent, the spending power of your money will be cut in half in about 25 years!

So if you retire at age 65, and live to age 90 — not unexpected these days — you may need a lot more dollars than you think. Social Security is designed to keep up with inflation, in theory. But what about the rest of your retirement income? A fixed, lifetime monthly payout from an immediate annuity might cover your expenses today and for the next few years but leave you woefully short in terms of buying power in 20 years.

How do you deal with inflation?

You could diversify out of dollars. But what other currency is more likely to hold its value over the years? Would you really rather do your planning in euros or yen or any other currency?

Gold comes to mind, but it actually has a fairly dismal record over the past 40 years. Gold performs well in a global crisis — and that might be the case in the future — but it looks more like a speculation than a hedge against the dollar.

Perhaps
bitcoin
or other cryptocurrencies will serve as a diversification out of dollars. So far, these currencies have fluctuated wildly in value against the dollar, and it will take some time to figure out which could become a generally accepted, extra-governmental store of value. But first they have to fix the security issues at the “exchanges” or “wallets” that are the unregulated transition points between the dollar and the cryptocurrency.

There is one investment choice that has beaten inflation over the long run for the past 90 years of recorded transaction history. And that winning choice — over the long run — has been the stock market! Specifically, the winner has been a diversified portfolio of large company American stocks, with dividends reinvested. The total return has far outpaced inflation as recorded by Ibbotson/Morningstar research dating back to 1926.

Over that long run, inflation has averaged 2.9 percent while the total return of the large-cap U.S. stock market (including dividends, and without factoring in taxes) has been 10.2 percent!

And that is the argument for always having some stock market exposure, even in the most volatile and scary markets. It’s also the argument for diversification — something easily done by investing in a S&P 500 stock index fund, which is offered in almost every retirement plan.

Notice the use of the term “long run.” That means a period of at least 20 years. If you have your money in cash over a 20 year retirement period, you are a sure loser to inflation. The amount of dollars you own will not go down if you keep the money in a bank CD or money market account. But the buying power will surely decline.

It’s easy to view the long run when you’re younger. But at some point, the 20-year long run becomes your life expectancy. That’s when the choices get tough. That’s also when you have the most money at stake, and when the decisions have the most significant consequences. And that’s The Savage Truth.

(Terry Savage is a registered investment adviser and the author of four best-selling books, including “The Savage Truth on Money.” Terry responds to questions on her blog at TerrySavage.com.)

(c) 2018 TERRY SAVAGE DISTRIBUTED BY TRIBUNE CONTENT AGENCY, LLC





Source link

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *