Investment Corner: Beating inflation with your money
For two years now, we’ve all seen high inflation erode the purchasing power of our money. Since May of 2021, the most recent 12-month inflation has been anywhere from 4% to a high of 9.1%. Compare that to the average inflation for the last decade of under 2%.
Meanwhile, after seeing stocks and bonds both drop dramatically last year, many people are uncomfortable enough that they are simply holding cash in the bank. But most folks are getting paid miniscule interest on their deposits. Many banks are paying .01% or .05% — that’s $50 of interest per year on a $100,000 deposit, while that same $100,000 loses $5,000 of purchasing power due to inflation.
So how do you make the best of our current situation, without taking on a lot of investment risk? As with so many things in life, the answer is “it depends.”
An important consideration is your timeframe. No good financial advisor or private investor can properly invest without having an idea of when the money being invested is likely to be needed. People with a shorter time frame, maybe a few years or even a few months, might largely avoid investing in the stock market due to risk. While the S&P Index, a broad basket of 500 larger U.S. company stocks, has historically risen in 94% of 10-year periods (a pretty good bet!), it has only risen 62% of individual months, historically. The shorter your investment timeframe, the riskier your stock investment will be.
Instead, those with a shorter time frame will find that they cannot safely “beat” inflation. The goal, in this case, should be to come as close as possible, without putting your assets at risk.
With most banks today paying paltry interest, a good money market fund may be the better place for your cash. Conservative, lesser-risk money market funds will invest in U.S. Government and U.S. Government Agency securities, so they are considered to be extremely safe investments. A number of these funds are currently yielding above 4%. Sure beats what the banks are giving you. How much money are you leaving on the table for no additional risk?
Another safer investment is government treasuries. Current rates range from around 3.5% for longer duration (5-10 years) up to 5% for shorter duration. These investments are backed by the “full faith and credit of the U.S. Government.” Combining these with a money market, and perhaps some short-term bonds, can make your returns more certain for the short term.
If your investment timeframe is 10 or more years, investing in a well-diversified portfolio of low-cost stocks and bonds has historically outperformed inflation. Vanguard notes that a benchmark 60-40 global portfolio (60% equities and 40% bonds) averaged a 6.1% return from January 2013 through December 2022–this in spite of a nearly 16% drop last year. While a 60-40 portfolio is not suitable for all investors, it has substantially outperformed inflation over the last 10 years and beyond.
Whatever route you take to deal with inflation, invest smart and invest well.
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com or by calling 775-299-4600 ex. 702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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