Worried About Inflation? Cash Might Offer Surprisingly Good Protection

Worried About Inflation? Cash Might Offer Surprisingly Good Protection
Andrew Rummer

almost 3 years ago1 min

In last month’s Casual Investor Survey of Finimizers’ financial hopes and fears, 90% of you said you think inflation will be running hotter a year from now.

And with ever increasing stimulus flowing from central banks and governments, perhaps that’s not so surprising. But a report this week from investment manager Richard Bernstein Advisors (RBA)  looking at the returns provided by various investments in the 1970s – the last time inflation really took off in the rich world – did surprise me.

You might assume that keeping cash in the bank would be a bad idea in times of high inflation, but – as the chart above shows – cash returned more than bonds over the course of the decade and suffered much smaller one-year declines.

The returns in the chart are nominal returns rather than real returns, which account for inflation. In real terms, those holding cash in the bank would still have struggled to grow their savings faster than prices were rising. But – crucially – cash did better than bonds and all portfolios of stocks and cash did better than equivalent portfolios of stocks and bonds.

“Since the 1980s bonds have been considered the cornerstone of virtually every capital preservation portfolio,” RBA wrote. “However, they were a terrible capital preservation investment during both the 1960s and the 1970s. No combination of stocks and bonds was superior to a combination of stocks and cash during those two decades.”

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