According to economists and policymakers, stubborn and high inflation may be with us longer than expected. As a result, your client portfolios may need a fresh perspective.
Staying with your allocation models when inflation appears to be transitory is one thing. It’s quite another thing when you consider how stocks and bonds might perform against sustained high inflation.
The following illustration shows how major asset classes performed during the Great Inflation of the ‘70s and early ‘80s. Pervasive negative real returns are a warning to advisors that a hold-the-course approach with traditional stocks and bonds could have severe consequences for clients.
You may be inclined to turn to familiar hedging strategies like gold, commodities, TIPS, and public REITs as a way to help stabilize your client portfolios. Each performed effectively during specific inflationary periods. But there is no one-size-fits-all strategy.
For example, Treasury Inflation-Protected Securities (TIPS) are designed to keep pace with inflation and may be appropriate for conservative mandates or risk-averse clients. However, they will not beat inflation. On the other hand, gold and commodities may be more suitable for growth-oriented clients seeking to outpace inflation, but they can suffer significant drawdowns and exhibit high levels of volatility.
The distinctive performance characteristics of these asset classes mean you need to approach the allocation process thoughtfully, based on what type of inflationary environment may lie ahead.
Will we have high inflation for a short period or moderate inflation rate for an extended period? Of course, we can’t predict future outcomes, but the inflationary profile of each asset class matters, as you can see in this illustration:
Gold excelled during the Great Inflation but posted losses during the shorter inflationary periods. Commodities performed well during the inflationary episodes above, but haven’t always kept pace. In addition, they have exhibited high volatility and long periods of negative returns.
As represented by the FTSE NAREIT All Equity REIT index, real estate exhibited admirable hedging capabilities during these inflationary episodes, making a compelling case for this asset class. In fact, real estate can provide multiple potential benefits as a permanent position in client portfolios, not just when inflation spikes.
In our next post, we will highlight some of those advantages, and specifically, we will discuss why multifamily private real estate investments are of particular interest to investment advisors today.
To learn more about the private real estate option, download our free eBook, A Potential Inflation Hedge for Today: Private Multifamily Real Estate.