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  • Writer's pictureKyle Rolek, Retirement Planning Specialist

How Can High Inflation Impact Investments?

Updated: Jul 26, 2021

Inflation vs. Stock vs. Bond From 1968 - 1982


- From 1968 - 1982, inflation averaged 7.4% per year.

- During this high inflation period, the S&P 500 stock index averaged 8.4% per year. This is slightly below the long-term average return of the S&P 500 since inception of about 10% per year, but it still beat inflation.

- During this high inflation period, "bond funds" averaged 5.6% per year. The Putnam Income Fund was used as a proxy for bond funds because this is one of the few bond funds that existed since the 1960s and is still around today.

- While this period did present challenges for investment returns, the S&P 500 stock index still successfully maintained money's purchasing power and beat inflation.

- While bond lost value to inflation from 1968 - 1982, retirement investors would still have been well served in most cases by keeping some money in bond. The S&P 500 was down 14% in 1973 and 25% in 1974. Without any bond, a retirement investor may have had a tough time riding out these consecutive stock market down years to benefit from the eventual recovery. Bond is useful as protection from needing to sell stock at bad times.

Why Does Inflation Matter?

Inflation is like a tax. It increases the price of goods and services over time.

During the 1970s, inflation increased by about 7% per year on average. At 7% per year inflation, expenses would double over a 10 year period.

Someone spending $60k per year today would need $120k per year to maintain the same standard of living 10 years later if inflation averaged 7% per year during the decade.

What Can You Do To Protect Yourself From Inflation?

Own assets that increase in value over time. This protects your money's purchasing power from inflation.

Since inception in the 1920s to present, the S&P 500 stock index has averaged about 10% per year. Inflation has averaged about 3% per year over the same time period. Stock has beaten inflation by a wide margin (over 3x the rate of inflation) over the long-term.

Even during the highest inflation period in our country's modern history, stock beat inflation. Inflation averaged 7.4% per year from 1968 - 1982. The S&P 500 stock index averaged 8.4% per year during the same time period. While the gap between stock and inflation was much smaller than long-term averages, stock still won by about 1% per year.

Bond hasn't historically faired as well in periods of high inflation as discussed above, but keeping some money in bond is also beneficial in most cases because bond reduces the risk of needing to sell stock at bad times.

Having a well-organized retirement plan with stock to protect your money's purchasing power from inflation and bond to ride out the down periods in stock is essential to protect your long-term financial security in retirement.

Note: This article isn't predicting that we're heading towards inflation like the 1970s. The Fed continues to reiterate their belief that recent inflation increases will be "transitory". Their thought is that once stimulus wears off and the initial boost in economic activity from re-opening normalizes, the recent jump in inflation will normalize too. Regardless of how inflation works out in the future, having a well-organized retirement plan that protects your money's purchasing power from inflation is beneficial for your long-term financial security.

Want To Discuss This Individually?

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This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures

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Article Disclosures


Informational Purposes

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.


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