Energy prices are low, interest rates are low and the outlook for the prices of imported goods is also low. That in turn sets a low ceiling for domestically produced goods as well. Those conditions won't change significantly anytime soon.
For those of us who remember the double digit rates of the 1970s, however, the inflation concern will never completely go away. And well it shouldn't as we go about setting aside ample funds for spending later in life.
That brings us to the second irrational fear too many of us have today -- an aversion to stock ownership for the long haul. The facts are straightforward on this subject as well --- owning stocks is both a great long term inflation hedge. The best way to achieve financial security over the long haul is not by owning bonds, gold or real estate. It's blue chip stocks.
Now let's consider these two irrational and related fears together --- inflation and stocks.
Inflation is the biggest enemy of those on fixed income. Too little concern for the ravages of inflation means big problems for retirees down the road.
Every retiree's single worst enemy has the breakdown:
"Retirees face a particularly dangerous financial enemy. Is it a poorly balanced portfolio? No. A bear market? No. A recession? No. What is this dastardly, nefarious, inscrutable enemy? Inflation.
If you are retired or about to retire, you most likely will live on the income you receive from your investments. When you're in that situation, inflation can take a big chunk out of your money and significantly impact your standard of living. Don't think it's a big deal? I suspect that's because inflation creeps up on us. Its stealthiness makes it all the more dangerous. To get a sense of its real destructive power, let's take a look at costs in 1961:
- Average new house cost in the United States: $12,550
- A new car: $2,849
- A Harvard tuition: $1,250
- Average price of gas: 27 cents per gallon
- A movie ticket: $1
- A pound of hamburger: 40 cents
- A loaf of bread: 21 cents
- A gallon of milk: $1
- Average income: $5,000
As a retiree investor, you should have a tool or an investment strategy that will address inflation. I don't believe staying in the market during bad times works. Consider this: Investors who rode the ups and downs of the market from 2000 until 2013 didn't get to enjoy the same lifestyle they had prior to the bear markets, even though they "got back to even."
Why? A lifestyle that cost $60,000 per year in 2000 cost $85,000 per year in 2013. If you lived on $60,000 a year in 2013, you would have to reduce your standard of living by almost a third compared to where you were in 2000.
I also don't think that investing everything in super-safe investments that pay little or no interest is a good strategy because you won't keep up with inflation.
My inflation-fighting advice? A buy, hold, sell strategy can help you stay ahead of inflation by keeping you in the market during good times without worrying about the bad times. Whatever you choose to do, don't ignore inflation. If you don't defeat it, it will defeat you."
The Fed will soon begin to raise short term interest rates from their historic lows, albeit ever so slightly, and perhaps as soon as this December.
Between now and then, pundits and market forecasters will try to make a big deal out of it, but long term focused individual savers and investors should be unfazed. It's an inevitability and not a game changer in any way. In fact, it will be a healthy development and signal that economic growth is stable and strengthening.
Current short term interest rates are too low, assuming the economy starts growing at a real rate of ~3%, which it will in time. When growth will reach that ~3% growth normalized rate is the only relevant question. Accordingly, long term stock investors should sit back and wait for that series of events to unfold.
Today stock prices aren't excessive, contrary to what many pundits are saying. The U.S. economy isn't even close to entering another recession. As a result, interest rates won't increase much for at least several more years. In the meantime, we'll have short term and often volatile market ups and downs, of course, but the general direction is up.
All that said, and even though stocks outpace all other asset classes in investment performance over the long term, too many people shy away from stock owsership in their 401(k) and IRA plans. That's a big mistake.
In sum, stocks win. They outperformed fixed income during the turbulent inflationary 1970s and are winning again in today's low inflation economy.
Stocks are the best inflation hedge and long term investment vehicle by far, regardless of whether interest rates and inflation rates are high or low.
It's a no brainer.
That's my take.