Real asset instruments derive their worth from physical value – you can touch, see and maybe even smell. Conversely, stocks and bonds derive their value from future cash flows and residual claims on a balance sheet. The tangible characteristics of real assets can create a foundation of protection against inflation. Real assets can also provide stability during geopolitical uncertainty and currency fluctuations. The chart below illustrates various assets often considered in this category. Some assets, such as real estate, are common in portfolios while collectibles, for example, are infrequently used. The chart below, “Direction of Inflation,” shows several of those real asset categories alongside stocks and bonds. Despite the link between some real assets, outperformance of the group broadly coincides with inflationary periods in the United States. The chart illustrates that by showing the historical returns of assets during periods of rising, stable and declining inflation.
The trend is clear, financial assets including stocks or bonds, perform better in stable or declining inflationary environments than when it is rising. By comparison, tangible assets do their best when inflation rises. It is important to keep in mind that the direction of inflation matters more than its absolute level. When inflation’s absolute level is established, the market and economy can adjust to the impact from inflation.
Inflation rises more frequently than we think. Since 1926 there have been 35 periods, during which it was definitively higher, the same number when it was lower and 21 periods when it remained stable. Historically, real assets have been additive during periods of rising inflation while stocks and bonds were shown to underperform.
The Trust Company believes that many investors do not account for inflation risk and that failing to do so can materially erode the realization of achieving long-term financial goals. It is our
conclusion that strategic allocations are the best way to protect portfolios against inflation which is why we added allocation to inflation linked investments last year to our portfolios. To learn
more about those changes or other questions please contact your relationship manager at The Trust Company!