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How Has Inflation Affected Portfolios in the Past, Present, and Future?


How has inflation affected portfolios in the past, present, and future? We go over historical data to put the current events we're seeing in perspective.

Full Transcript:

Hello, welcome to Arista Advice! We're coming to you today with some advice from the backyard of our office. Hope you enjoy! Question of the week is: "Paul, how has inflation affected portfolios in the past, present, and future?"

Well, before we dive into data, let's first look into what is inflation. Inflation is when too many dollars are chasing too few goods. Inflation also measures the price of goods, so it's important to always remember that inflation is good, but also, it can be bad if it's unkept and unchecked. 

There are two types of inflation. There's the cost-push inflation  and that's the production costs, such as materials and wages. Then supply declines due to higher costs and businesses passing this cost on the consumer through higher prices.
Then there's the demand-push inflation. The consumer demand surges, supply declines due to higher demand, which means consumers are willing to pay more and prices increase. 

As you'll see in this chart, going back to 1969, there was a big booming economy like we've seen in the last 10 years here in the US. In the 60s there was a booming economy, and it ended with an inflationary period. We've had a booming economy here in 2020 and 2018 and 2017 and 2015, and now we're dealing with inflation. Also, the chart going back to OPEC in '74. We had the Iran-Iraq oil prices back in '79. 1990, we saw the oil and Gulf War. We can all remember that, and then gas prices once again crept up in 2007 and it led to more inflation, and then in 2021, we had the unexpected Covid. 

It's always important to stay ahead of inflation by making sure your portfolio is always invested in the right asset classes. Remember that historically stocks have always been the best hedge against inflation. There's always going to be some headwind and some reason to abandon a well-diversified portfolio, but we don't give headwind to that. We stay diversified. We stay invested, and we are always thinking long-term in a short-term world.

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