Inflation: Is There a Cure for Your Portfolio?

I wrote recently about the role that inflation worries are playing in the current financial markets. The current rate of inflation in the US is 5.4%, according to the US Bureau of Labor Statistics, up from the roughly 2% (or less) level it occupied during much of the time since the 2008 financial crisis and the ensuing Great Recession.

With inflation apparently on the rise, many investors are concerned about its effect on the purchasing power of their portfolios. After all, inflation is the “silent thief,” making the dollars in your account worth less in terms of what they will buy, as goods and services increase in price.

Some recent research by analysts at Dimensional Funds may shed some light on the long-term effects of inflation on various types of portfolio assets. For their study, researchers looked at various asset types, including US Treasury securities, various types of non-governmental debt instruments, industry groups, and stock market sectors to see what type of real return they generated during periods from 1927 to 2020 when inflation was running above the median range (generally, 5.5% or higher). By “real return,” they mean the performance of the assets net of inflation: after factoring in the effect of inflation, how much did the assets increase or decrease in value?

SOURCE: Dimensional Fund Advisors. Past performance is no guarantee of future results; indexes are not available for direct investment.


The only investment in the study that failed to growth at a higher rate than inflation was short-term Treasury securities (T-bills). Every other asset class demonstrated real growth, net of inflation. The five asset types that demonstrated the best growth rates net of inflation were small-capitalization value stocks (11.95%), energy stocks (9.92%), large-capitalization value stocks (8.13%), the business equipment sector (7.23%), and the financial services sector (6.52%). By comparison, the broad stock market exhibited real growth of 4.91%, and five-year Treasury bonds grew at a 0.77% rate in real terms.

What do these figures suggest? First, it seems that one of the best inflation hedges for your portfolio is simply to remain invested according to your long-term plan. Keep in mind that the study illustrated above included period of double-digit inflation—like the 1940s and the 1970s—as well as periods of deflation—like the Great Depression and the early years of the Great Recession.

Of course, for some investors, too much exposure to investments that have historically outpaced inflation by the most generous margins may not be advisable. For those with a low tolerance for the type of volatility that is part of the equity markets, greater emphasis on securities with built-in inflation protection, such as Treasury inflation-protected securities (TIPS) may be an important part of the answer. In fact, I recently discussed some of the advantages of US Treasury bonds with an included inflation “reset” feature.

No one knows what next month’s inflation reading will be, just as no one knows for sure what tomorrow’s headlines will say. No one, including yours truly, has a working crystal ball that is 100% accurate. However, we don’t need one. Research indicates that the best way to hedge against inflation in your portfolio is to do what my motto says: Stay your course!

As a fiduciary financial advisor, I work with family stewards and other informed investors to develop and implement financial strategies designed for long-term success in all types of market and economic conditions. To learn more, click here to read my white paper, “The Informed Investor.”


Stay Diversified, Stay YOUR Course!