The best investments in inflation? An adviser studied 95 years of returns to find an answer

A financial planner who studied inflationary periods in the U.S. going back to 1900 believes he knows the best way to invest during inflation.

  • We often look to the 1970s for lessons on inflation, when the annual rates topped 10% four times.
  • Here's a look at how stocks, bonds and other assets performed and some lessons we can glean today.

Inflation is making these nervous times for anyone who invests in stocks and bonds. But there's no need to lose your cool.

With the rate of inflation having risen to 7.5%, highest in 40 years, is it best to stay the course or to bail out in search of higher returns with other investments? 

Based on research, certified financial planner Ray LeVitre believes he has the answer.

LeVitre, who founded the Net Worth Advisory Group in Sandy, Utah, took a close look at bursts of inflation over nearly a century. Most of those periods came and went within a couple of years, often followed by solid rebounds.

But one of the most troublesome periods was the sustained inflation of the 1970s, which led LeVitre to examine it closely to see what lessons it holds for today.

Between 1973 and 1982, the annual inflation rate never fell below 5.8%. In four of those years, it exceeded 10% – a far cry from the 3% annual inflation rate on average since 1926.

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How would a $10,000 investment play out during peak inflation?

To anyone holding stocks, the onset of the inflationary spiral was devastating to portfolios. Investing $10,000 entirely in a mix of stocks – from large cap growth to small cap value – in 1972 would have shrunk by $3,935, nearly 40%, within two years, LeVitre's analysis shows.

But from there, it would start to rebound. It would take until 1976 to pass $10,000 again but by 1982, it more than doubled to $22,827.

It's an impressive-sounding gain and it came close to matching inflation over that 10-year span, falling only $111 short. 

Investing $10,000 entirely in a mix of bonds – no stocks or cash – would have resulted in falling $1,275 behind inflation. And going entirely to short-term instruments by buying only Treasury bills also came close to beating inflation.

Investing in a 50-50 mix of stocks and bonds, however, would have provided investors with the asset mix necessary to beat inflation, LeVitre said. During the 1970s, those investors would have managed to have come out $209 ahead.

For purposes of the study, the hypothetical stock portfolio would have consisted of various index funds, evenly split between growth and value. It included 50% large caps, 20% mid caps, 10% small caps and 20% in foreign stocks. Nothing exotic.

His conclusion?

“What’s interesting for this period is is that each portfolio I tested had pretty similar returns and kept up with inflation with varying amounts of volatility,” LeVitre said.

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Commodities can also help investors beat inflation, study shows

As such, it’s a case for holding the line. But not all would agree.

A study released last year by the London-based investment management firm Man Group found that commodities performed best overall during eight inflationary periods studied. Stocks performed poorly and bonds offered weak returns.

And clearly, the nation’s current situation has some major differences from past inflationary periods. In the 1970s, the nation was reeling from an oil export embargo by Arab countries to protest U.S. support of Israel in 1973’s Yom Kippur War, stagnant economic growth that gave rise to the term “stagflation” and later in the decade, gasoline shortages that caused long lines at stations and drove up prices.

The stock and bond markets have been roiled recently, prices of many household items are sharply increasing, and the price of fuel oil is soaring. The rise in consumer prices has been particularly surprising because, for a decade, prices have risen by less than 2% in some years. The consumer price index rose by 7.5% in January, compared to the same month last year, the largest increase since February 1982

Today, the U.S. is an oil exporter nation itself, no longer as dependent on oil from the Mideast and elsewhere abroad. The current bout of inflation follows government intervention in the economy due to the coronavirus pandemic and comes after a series of big government stimulus packages to try to keep the economy purring. Critics say, however, they ended up feeding inflation.

The Biden administration has insisted inflation will be temporary. The Federal Reserve is expected to attempt the delicate task of starting to raise interest rates to head it off as soon as next month in a manner that won’t trigger a recession.

There’s no way to know when the inflationary spiral will end, but LeVitre believes there is enough evidence to support the case for sticking by traditional investments.

Investors won’t make a killing by any means during prolonged inflation, but at least they can tread water or come out slightly ahead.

“I would stay with stocks. I would continue doing what you’re doing with your diversified portfolio,” he said.