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A 'Back to Basics' Approach to Long-Term Inflation Risks

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Planning ahead for your financial future isn't all about managing an investment portfolio. Costs for everything from prescription drugs, home insurance, veterinarian services and real estate taxes have shot up between 117% and 272% since 2000, finds a recent Senior Citizens League study.1  

Inflation might not seem like it's taken a significant bite out of your wallet over the shorter-term. But spiraling prices over longer periods tend to eat away at portfolio gains, in the process eroding a nest egg's value and undermining your efforts to reach a secure financial future.  

The impact of rising prices can hit you in different ways. That's because inflation's rise is often rather subtle and spread across hundreds of different products and services. Just consider how much of a chunk it has taken from a typical consumer's 'buying power' over the past two decades:

  • The average price for a pound of ground beef at a grocery story, for example, went up by 127% from 2000 to early 2021, according to the Senior Citizens League's annual "Loss of Buying Power" report.
  • Meanwhile, such research found that average retail costs of oranges, potatoes and bacon rose between 108% and 134%.
  • The study's findings also listed total out-of-pocket medical costs for those on Social Security as increasing by an average of 142% in this 20-plus year period.

The same corrosive forces are at-work in the long-term investment planning process. Along these lines, IFA's wealth advisors find putting money to work in equity markets to be a particularly effective way to battle the ravages of long-term inflation.

Consider the graph below, which compares how a blue chip index of U.S. stocks would've protected a hypothetical investor against the ill-effects of inflation over an extended timeframe. Starting in 1928, the value of $1 as represented by the IFA SP 500 Index rose to $5,345 by the end of 2020.

In this same 90-plus year period, $1 put into a relatively low-risk one-month U.S. Treasury bill would've also shown a positive outcome, albeit at a much lower growth rate. It increased in value to $20.37 during this timeframe.

Such a fixed-income investment, however, ran a fairly close race as opposed to the rate of inflation. Of particular note: This period included a significant drop in the Consumer Price Index during the Great Recession years. Even so, prices increased by more than 14 times the index's original value to $14.52. 

At times, though, a stock portfolio can run into headwinds fighting inflation. For example, during the 17-year period from 1966–1982, the annualized return of the IFA SP 500 Index was 6.86% before adjusting for inflation. After taking into account the impact of rising prices (as measured by the CPI), that gain was reduced to 0.04%. 

And many long-term investors will probably remember the "lost decade" from 2000-2009. In this period, the annualized return of the IFA SP 500 Index dropped from –0.96% before inflation to –3.40% after inflation.

Some investors might try to time such bouts of inflation by using a range of alternative fund strategies, from commodities and hedge funds to private-equity. 

In one seminal study about "liquid alts," researchers at Dimensional Fund Advisors found such alternatives too frequently charge much greater expense ratios than a typical "long-only" stock fund.2

These are considered the "hard" costs that investors run into. Prospectuses, though, don't reflect all of the actual trading costs associated with mutual funds. These so-called real costs include high-volume trading and other market impact costs associated with fully implementing a fund's strategy. 

We can estimate the impact of these types of costs by looking at a fund's annual turnover ratio. For example, a rate of 100% means that a manager turns over the entire portfolio in one year. Along these lines, it's worth noting that DFA's research also identifies liquid alts managers as showing a greater tendency to produce relatively high turnover rates. 

Given the added complexities and general lack of transparency in design and execution, IFA's Investment Committee remains confident that stock funds — not liquid alts — are the best investment vehicles to overcome the nasty aftereffects of long-term inflation. 

Rather than trying to get too exotic and invite more risk-taking in your portfolio, IFA urges you to take a more practical and 'back to basics' approach to countering inflation. Simply put, this comes down to investing in a globally diversified portfolio of index funds tilted to factors that leading academic research shows are key drivers of longer-term returns such as value, size and profitability

As part of devising a strategy to most effectively combat the harmful long-term impact of rising prices, we suggest that investors feel free to start an ongoing conversation with an IFA wealth advisor about creating a comprehensive and individually tailored financial plan. It's a service we offer to all of our clients at no extra charge


1.) The Senior Citizens League, "2021 Social Security Loss of Buying Power Study," May 2021. 

2.) Dimensional Fund Advisors, "Alternative Reality," Aug. 1, 2018. 

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance.  For more information about Index Fund Advisor, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.