Inflation is on everyone’s mind. Unfortunately, we do not know when inflation will peak — so all we can do is prepare.
I think one’s natural inclination is to run for protection when inflation starts to rise. But there’s nowhere to hide that’s really comfortable because inflation will slowly eat away at cash and cash holdings will lose value. Bonds, while they are an essential component of portfolios, are actually less attractive in an environment of inflation. Stocks may be volatile, but they’re uniquely suited for the times we are in. But of course, when we say stocks we mean a globally diversified portfolio and time to let equities work for you.
People are sometimes uncomfortable that stocks are “lumpy” — meaning most returns come in short periods of time. Yet, time after time, the value of a globally diversified portfolio of stocks has stayed two steps ahead of inflation.
The quest for immediate gratification is ubiquitous, and it’s a shame because that’s not the way the world works. With stocks, the returns often come in short periods of time and you usually don’t know when. You have to be in the “market” at all times to capture these returns.
I think the conclusion for me for inflation is there’s not much you can do about it, but you can protect yourself from it by embracing a diversified portfolio of stocks, bonds, cash; the right mix with value stocks. And I think that’s a way to mitigate inflation. I think you have to remember that we have had approximately 3% inflation over time, yet returns of a globally diversified portfolio have exceeded that by a large margin in the past. The way we can live with uncertainty is by knowing our stock market history well.
I think the takeaway is that inflation is a mindset. It’s people stepping out of their normal mindsets and beginning to panic/hoard. I would encourage people to listen, take a deep breath, and try to do the right thing, which clearly in our mind, is to embrace a globally diversified portfolio of stocks and bonds and execute that plan as soon as possible. Having been professional market participants our whole careers, we are really good at being patient. We’ve seen booms and busts, and one thing we’ve learned is to trust market prices. Let the market be your friend. It can be enormously rewarding if you can stay invested during the inevitable times of uncertainty.
Jeff Holland | VIAIV