PLANSPONSOR - October/November 2019 - 44
INVESTMENT FOCUS
Just Around the Corner?
Whenever inflation does arrive, there are investments to fight it
T
he basic process of inflation is pretty
simple: a general rise in prices across
the economy, increasing the cost of a
wide range of goods. Participants in retirement
plans who are still in their working
years are likely to make up for it, through
higher wages and, in turn, higher savings.
But for people in retirement, or those closing
in, inflation can have a double-barreled
impact on both their investments and lifestyles.
Answers to the inflation question
are not a sure thing, but sponsors have a
variety of inflation-fighting investments,
to offer retirees an educated choice.
In the U.S., inflation as measured by
the Consumer Price Index (CPI) has run
at low levels for a long time-the annual
average for the current century is just over
2%, and annual inflation has not topped
4% since 1991.
In the 1970s and 1980s, though,
inflation was rampant, and the collateral
damage on the investment side of retirement
was breathtaking: For equities, the
Standard & Poor's (S&P) 500 started to lag
the CPI late in 1973 and failed to fully catch
up until the end of 1983. The chart shows
the S&P 500 and the Bloomberg Barclays
U.S. Aggregate Bond Index from the start
of 1976 through 1983, when the worst of
the inflation storm had passed. For this
shorter period, stocks held their own,
while bond investors kept up with inflation
until mid-1979 but then suffered through
the end of 1983.
" The effects on bonds are just straightforward
math, " says Chris Brightman,
chief investment officer (CIO) at Research
Affiliates in Newport Beach, California.
" When inflation rises, nominal interest
rates rise and the prices of bonds go
down. Less well-understood is the damage
44 PLANSPONSOR.com October - November 2019
Art by Lars Leetaru
inflation does to equity portfolios. "
He elaborates: " We never see inflation
that is high and stable at the same
time. Inflation might be measured at 20%
after the fact, but, in the middle of it, the
markets don't know whether inflation at
a given moment is 20%, or 10%, or 30%.
That makes the risk premium for equities
soar and the prices of stocks plummet. "
Aggravating the portfolio volatility is
the erosion of retirees' purchasing power.
From 1973 through 1983, the rise in the CPI
was about 100%-cutting the real value of
a fixed-income portfolio in half. For retirees
who followed the conventional wisdom of
investing heavily in bonds, maintaining
their lifestyle required spending more
nominal dollars-i.e., those not adjusted
for inflation-while asset values gyrated.
Sooner or later everyone has to face the
possibility of inflation in retirement, but
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PLANSPONSOR - October/November 2019
Table of Contents for the Digital Edition of PLANSPONSOR - October/November 2019
Investment-Driven
2019 DC Survey: Plan Benchmarking
Projecting Participant Outcomes
Just Around the Corner?
The Search for Basis Points
It Could Be Time to De-Clutter
PLANSPONSOR - October/November 2019 - C1
PLANSPONSOR - October/November 2019 - FC1
PLANSPONSOR - October/November 2019 - FC2
PLANSPONSOR - October/November 2019 - C2
PLANSPONSOR - October/November 2019 - 1
PLANSPONSOR - October/November 2019 - 2
PLANSPONSOR - October/November 2019 - 3
PLANSPONSOR - October/November 2019 - 4
PLANSPONSOR - October/November 2019 - 5
PLANSPONSOR - October/November 2019 - 6
PLANSPONSOR - October/November 2019 - 7
PLANSPONSOR - October/November 2019 - 8
PLANSPONSOR - October/November 2019 - 9
PLANSPONSOR - October/November 2019 - 10
PLANSPONSOR - October/November 2019 - 11
PLANSPONSOR - October/November 2019 - 12
PLANSPONSOR - October/November 2019 - 13
PLANSPONSOR - October/November 2019 - 14
PLANSPONSOR - October/November 2019 - 15
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PLANSPONSOR - October/November 2019 - 19
PLANSPONSOR - October/November 2019 - 20
PLANSPONSOR - October/November 2019 - 21
PLANSPONSOR - October/November 2019 - 22
PLANSPONSOR - October/November 2019 - 23
PLANSPONSOR - October/November 2019 - 24
PLANSPONSOR - October/November 2019 - 25
PLANSPONSOR - October/November 2019 - Investment-Driven
PLANSPONSOR - October/November 2019 - 27
PLANSPONSOR - October/November 2019 - 28
PLANSPONSOR - October/November 2019 - 29
PLANSPONSOR - October/November 2019 - 30
PLANSPONSOR - October/November 2019 - 31
PLANSPONSOR - October/November 2019 - 2019 DC Survey: Plan Benchmarking
PLANSPONSOR - October/November 2019 - 33
PLANSPONSOR - October/November 2019 - 34
PLANSPONSOR - October/November 2019 - 35
PLANSPONSOR - October/November 2019 - 36
PLANSPONSOR - October/November 2019 - 37
PLANSPONSOR - October/November 2019 - 38
PLANSPONSOR - October/November 2019 - 39
PLANSPONSOR - October/November 2019 - Projecting Participant Outcomes
PLANSPONSOR - October/November 2019 - 41
PLANSPONSOR - October/November 2019 - 42
PLANSPONSOR - October/November 2019 - 43
PLANSPONSOR - October/November 2019 - Just Around the Corner?
PLANSPONSOR - October/November 2019 - 45
PLANSPONSOR - October/November 2019 - 46
PLANSPONSOR - October/November 2019 - 47
PLANSPONSOR - October/November 2019 - The Search for Basis Points
PLANSPONSOR - October/November 2019 - 49
PLANSPONSOR - October/November 2019 - It Could Be Time to De-Clutter
PLANSPONSOR - October/November 2019 - 51
PLANSPONSOR - October/November 2019 - 52
PLANSPONSOR - October/November 2019 - 53
PLANSPONSOR - October/November 2019 - 54
PLANSPONSOR - October/November 2019 - 55
PLANSPONSOR - October/November 2019 - 56
PLANSPONSOR - October/November 2019 - C3
PLANSPONSOR - October/November 2019 - C4
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