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Beating Inflation

Yes, the stock market still beats inflation

Watching the stock market fall this year has got some people questioning whether investing in stocks is still the right thing for them. There’s no question about it: watching the value of your investments fall day after day is hard. It’s hard when you’re 30, and it’s even harder when you’re 60. You begin to question whether you made the right choice by investing in the stock market. You look wistfully at the 5% guaranteed return on GICs and start thinking maybe you should sell at least part of your portfolio. If you’ve got cash sitting around, you might be nervous and are wondering if they should wait until the market recovers before investing it.

These doubts are normal. I’ve had them too over the past 25 years I’ve been investing. In my experience, every major market decline gets people wondering if it’s different this time. Is there going to be a long-term impact on the financial world? Is the stock market dead?

I can say this with confidence: it isn’t different this time. It’s never different. Sure, every market pullback is unique in terms of the reasons for the decline and the trajectory - and it’s this very difference that makes people wonder whether the fundamentals underpinning the market have changed. But even the Global Financial Crises – a term not exaggerated in its nomenclature – only took the market out at the knees for one year.

There are a few things that you can do to bolster your confidence in your stock market investments: stop looking at the market every day, keep the big picture in mind, and keep your losses in perspective. And here’s another one, which I think is the most important: remember why you got invested in the first place.

Stock market versus inflation

Ask yourself, “Why did I think the stock market was a good idea again?”

And then say out loud: “Oh yeah, to make my money grow faster than inflation.”

The stock market has a long history of going up by more than inflation, preventing savings from being eroded by price increases. In practical terms, this means that in 20 years, the $100 you set aside now will still be worth $100 in purchasing power, and then some. This is crucially important.

To get an idea of the magnitude of this, here’s an example. If you’d parked $1,000 in a chequing account in 2012 thinking you’d buy a $1,000 TV in 2022, that TV now costs $1,280. Oops, you’re $280 short. If you’d taken that $1,000 and put it in a Canadian stock market ETF, it would be worth $2,130, plenty of money for the TV and a ticket to Mexico. Boom!

The key is this: the market doesn’t beat inflation every year. For example, today your life costs about 7% more than it did a year ago while the Canadian stock market has fallen 5% so far this year, leaving you feeling 12% poorer. That wasn’t the plan.

Don’t worry. You’re not a short-term investor. You know you have to think long term. So let’s get some perspective.

Long-term perspective

If we go back 35 years and compare the Canadian stock market return to Canadian inflation, we will see that being invested in the market was a great way to combat rising prices. If you invested $100 in the market at the beginning of 1987 and held it until today, it would be worth $794. And something that cost $100 in 1987 costs $231 today. Clearly being in the market was a benefit.

Ok, but you haven’t been invested for 35 years. What about shorter time period?

The 1980s saw high inflation (and a stock market crash) so let’s start with the first 5 years of the 35-year time horizon we are looking at. If you’d invested $100 in the beginning of 1987, you’d have $109 after five years. Meanwhile, the price of a $100 item would have risen to $124. So during this five-year period, the market didn’t beat inflation. A little painful.

But wait! If you’d thrown in the towel at the end of 1991, sick and tired of watching the value of your money erode, you’d have missed out on a huge year: in 1993, the stock market rebounded by 29% and by the end of that year, your purchasing power was restored: your $100 was worth $135 while the $100 item in 1987 cost $129.

How about more recent time periods? Over the past five years (including this year), your $100 investment grew by 67% while inflation grew by 20%. Over ten years, your investment grew 97% and inflation rose 41%. The stock market wins.

In fact, over the past 35 years, inflation outgrew the stock market in just 11 years. So about 30% of the time you’ll feel some pain but as we’ve seen, the stock market beats inflation over longer time period.

2022 investors take heart! One year doesn’t matter. Even if you’re close to or in retirement, this year’s stock market return and inflation isn’t going to derail your plans. The younger you are, the less it matters.

And if you’re dilly dallying and avoiding investing the cash you have sitting around, just get it invested. You don’t want to miss a year like 1993 (or 2016, 2009, 2003, 1999) when the market had a strong rebound after a dismal year. We don’t know when that’s going to happen. Don’t miss out on the party.


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