By Tom Brieter
Just hearing the word inflation brings back memories for any of us who were old enough to remember the 1970s. Gas lines, Nixon’s price control policies, a war that dejected the country and decreased confidence, all worked to cause stocks to declined 35 percent or so between 1972 and 1974. The inflation rate was high single digit for a good part of the decade and peaked at 13 percent in 1981.
Worse yet, the recovery period was so long that the Dow Industrials Average didn’t exceed 1,000 permanently until the fall of 1982. The Dow touched the 1,000 level briefly in the very late ’60s, again in 1972 and 1976, but took about 13 years to stay across that first 1000 point milestone. Of course, when looking back you just have to say, "We’ve come a long way baby!"
The rampant inflation of the 70s caused all sorts of problems, but fortunately was not the norm. In fact, long-term history shows that the overall rate of inflation tends to run right at about 3 percent. I am personally optimistic that the rate of inflation will remain fairly low in the next 10 – 20 years due to the massive globalization of the world’s economies and the ability to produce goods and services where they can be accomplished most efficiently and then deliver them anywhere in the world.
Even though 3 percent is a reasonable expectation for the inflation rate in the future, it is important not to get lulled to sleep in your investment planning, and assume that a 3 percent rate of inflation doesn’t need to be accounted for.
Over 10 years, $100,000 of spending power will be reduced to $73,742 by a 3 percent inflation rate. After 20 years your spending power would be reduced to $54,379, and to $40,101 after 30 years.
In past articles I have touched on the topic of not ignoring equities as part of a retirement investment plan. The superior long-term returns historically provided by common stocks is undeniably the best way to keep the inflation boogey man at bay, despite the periodic headaches caused by inevitable stock price gyrations over shorter periods of time.