One of the most common arguments from stock marketers is to invest in stocks so that over time, you can “beat inflation.”
“Beating inflation” is a worthy goal. If inflation is three percent per year, and your assets grow at only three percent, then in terms of your real world spending power, you are no better off.
Here are the numbers (historical data provided by The NYU Stern School of Business*):
An interesting data point here is that since 1976, inflation has actually been higher than the popularly used 3 percent number – averaging about 4 percent annually. But, stocks have actually performed even better than the widely stated 9.5 percent per year. The S&P has averaged about 12 percent per year from 1976-2013, while inflation has averaged approximately 4 percent (netting investors approximately 8 percent above inflation).
If an investor had taken a more balanced approach to investing using a hypothetical portfolio mix of 50 percent S&P 500 Index and 50 percent US T-Bills, they would have averaged approximately 9 percent per year and outperformed CPI (inflation) by approximately 5 percent per year on average.
However, these numbers are in general from unmanaged *indexes (this does not include index or mutual fund costs or taxes).
What are some real life examples of how you could offset the rising costs that you encounter in your everyday spending?
Remember this: if you’re worried about inflation…then own companies that sell items that tend to inflate in price.
For instance, take gas for your car. The cost of travel (hotels and airline tickets). The cost of day to day transportation (the cost of cars, pickup trucks, and insurance).
Here are five real world areas of spending that I think of immediately when I hear the word inflation.
- Energy Costs (fuel and electricity during the summer heat and driving season and natural gas during the winter months as my heat kicks on)
- Medical Care (prescription drugs, eyeglasses, and visits to the doctor) – also driving up the cost of healthcare insurance.
- Recreation (the cost of cable TV, movies, pets and pet products)
- Housing (the cost of rent or property prices to own a home)
- Food (groceries and restaurants)
So what companies (or industries) are directly responsible for providing these goods and services that tend to inflate in price over time?
Let’s start with prices at the pump. Do you own oil companies that are actually selling to you every time you fill up your gas tank? Driving down Piedmont Road you will pass a BP, a Chevron, and an Exxon gas station. All three are publically traded companies that make money from the sale of oil and gas. As prices at the pump rise, it is likely that these large integrated oil companies are able to increase profits as well. Instead of trying to pick one company or stock involved with the energy business, investors can look at various ETFs (exchange traded funds) that hold various companies in a particular industry. One such ETF is XLE** (Energy Select Sector SPDR) that holds approximately 43 energy related companies.
A similar relationship occurs with your cable bill, cell phone bill, electricity, natural gas, healthcare, prescriptions, food, and the list goes on.
So, if you’re worried about inflation, you may want to consider owning the very companies that make the things with inflating prices. Continuing with our real world (gas prices) example from above, the average American drives 15,000 miles a year – that’s about 750 gallons of gas at 20 miles/gal. A one dollar increase in gas will cost about $750 extra in a given year.
Owning 175 shares of Chevron (CVX**) or approximately $20,500 worth would pay an annual dividend of about $750 ($4.28/share X 175 shares). It’s also worth noting that Chevron** has increased this annual dividend every year since 1986 when it was paying 60 cents per share annually versus today’s $4.28.
Bottom line
What we spend on goods and services in our everyday lives tends to rise due to inflation. Next time you are at the grocery store, paying your cable or utility bill, or putting gas in your car, take note of who you are buying from. A hedge against real world inflation may be staring you in the face.
Historical Performance Data disclaimers
*Stating various index returns (S&P 500 and US Treasury Bonds, Notes, and Bills) simply represent past performance data and historical return data. Note that past performance and historical performance data is not a guarantee of future results. All investors are advised to conduct their own research and due diligence for any investment before making purchasing decisions. Investors are also advised to consult their individual financial advisor or representative and/or determine if any potential investment fits in line with their personal goals and risk tolerance.
**Individual companies and ETFs (exchange traded funds) mentioned in this article are not recommendations to buy or sell securities, and are simply examples of investments that are related to various industries or sectors of the stock market and/or economy.
