How to Beat Inflation with Stocks and Bonds | The Informed Investor 47

Episode 47: What should investors do to cope with inflation?

Plenty are probably wondering what to do next now that inflation is rising again.

The first move: Try to understand how inflation impacts investments.

The next move: Determine whether your portfolio is positioned to manage the risks of inflation and still achieve your financial goals.

One key principle to get comfortable with is that expected inflation is incorporated into the expected returns demanded by market participants. The important implication is that market prices adjust to compensate for inflation expectations so that expected returns after accounting for inflation (also known as expected real returns) stay positive.

This principle applies to both stocks and bonds, and it's good news for investors.

When you participate in capital markets, you can potentially increase your purchasing power with growth investments or prevent a loss of purchasing power using strategies that keep up with unexpected inflation.

Dimensional research suggests that simply staying invested helps outpace inflation over the long term for a wide range of asset classes, and the firm's analysis covers periods with double-digit US inflation as well as periods with deflation. https://www.dimensional.com/us-en/insights/are-concerns-about-inflation-inflated

Over the long haul, stocks have beaten inflation by a significant amount. https://www.dimensional.com/us-en/insights/will-inflation-hurt-stock-returns-not-necessarily

Treasury and corporate bonds have also outperformed inflation, although by much smaller margins than stocks. https://www.dimensional.com/us-en/insights/will-inflation-hurt-stock-returns-not-necessarily

Meanwhile, Treasury Inflation-Protected Securities (TIPS) have been a useful tool to "hedge," or track, unexpected spikes in inflation. https://www.dimensional.com/us-en/insights/tips-can-help-investors-when-inflation-spikes And additional tools are available to achieve this goal.

Some investors may wonder whether cryptocurrency, gold, or other commodities can help outpace or hedge inflation. The evidence here is much less convincing.

In Episode 47 of The Informed Investor, Dimensional's Mark Gochnour, Head of Global Client Services, Sooyeon Mirda, Senior Investment Strategist, and Jake DeKinder, Head of Client Communications, dissect the key role that inflation plays in investing and lay out several solutions for investors concerned about the short- and long-run impacts.

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Jake DeKinder on LinkedIn https://www.linkedin.com/in/jake-d-4105b98/

Sooyeon Mirda on LinkedIn https://www.linkedin.com/in/sooyeon-kim-mirda-cfa-1bb99584/

Learn more at https://www.dimensional.com/