What are the best investments to fight inflation?

Ron Finke
Your money

Last week I discussed the problem of holding bonds during a period of rising inflation. Not only does the older rate of income paid fall short of keeping up with the cost of buying goods and services, but the value of the bonds in your portfolio falls.

Ron Finke

The worst case I heard about from one local man was this situation. He held his bonds in his retirement plan through the late 1970’s until they were worth much less than face value. Then he sold them and bought gold, silver, and diamonds and other gems. (You could do that in qualified accounts back then.)

He bought those hard assets at their peak prices in the early 1980’s. Then as Fed Chair Paul Volcker used higher interest rates to force down rising prices, he watched his balances of those investments continue to drop until he sold them at about 40 percent loss. Worst timing ever!

Remember that inflation is too much money chasing too few goods and services. It matters not why there are too few goods. The current supply-chain problems will work just fine. If you really need a new or good used car right now, you will have to pay up for it.

So which investments perform best in an inflationary environment? To learn from history, I go back to the late 1970s and early 1980s to check the results of asset classes then. You may recall that a global food shortage and the OPEC oil embargo caused the first shock to the system. CPI registered gains of 8.8 in 1973 and 12.2 percent in 1974. A new low point occurred in 1976 at 4.8 percent.

Under President Jimmy Carter’s administration, CPI rose percentages of 6.8 in 1977, 9 in 1978 and 11.35 in 1979, reaching a climax in 1980 of 13.5 (Bureau of Labor Statistics). Americans were buying cars and houses as fast as they could since prices and mortgage rates would only be higher a few months later. Sound familiar?

Although 1977 was unusual in that the stock market fell during a president’s first year in office, the total return for the period from Dec. 31, 1976 through Dec. 31, 1980 was 26.34 percent. The three years beginning Dec. 30, 1977 and ending with year end 1980 show a gain of 42.75 percent.

Gold is a little more difficult to track, but sdbullion.com shows an ounce’s price rising from less than $150 in 1976 to about $500 by the end of 1979. The 1980s chart indicates that it reached a high over $900 per ounce. I would call that an effective inflation hedge, wouldn’t you? Real estate kept up with the inflation trend also until the 1981-82 recession forced those prices to drop again.

Unfortunately, many widely used indexes for financial assets were not tracked then as they are today. I am limited in providing for you the breakdown of other market segments such as the Russell 2000 index for small capitalized stocks or particular industries.

Why would stocks in general be inflation-fighting solutions? Companies producing products we all need and use every day have what is called pricing power. As prices of raw materials or labor increase, those companies are able to raise their own product prices and still make a profit. As a shareholder, you will be the beneficiary of that ability. So think about which things you cannot do without or services that everyone values the highest.

The current government economic gurus insist that inflation will lessen by mid-year 2022. I hope and pray they are right, but I doubt that. Since nothing changes in a day, we will be watching these trends to adjust investments accordingly. This is never perfect, but there certainly are investments that keep pace or surpass inflation more effectively. When ice cream is $10 for 48 ounces, I still want to eat some!

(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)

(Market index statistics from Worden Brother, Inc., TC2000, 2021.)

Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at rcfinke@stewcap.com.