Example Of Inflation

The Economic Beat column in Barron's was primarily about the run up in gold, whether it has been justified or not and how far it might go. One point made that is relevant to this blog is that gold, adjusted for inflation would need to go to $2000 to equal its 1980 high of $850.

The point here is not to debate what gold will do or how useful looking at gold adjusted for inflation is.

Think of the $850 as someone's monthly living expenses in 1980. The same lifestyle today would cost $2000. Applying the same inflation rate over the next 26 years would take today's $2000 in expenses up to $4705 per month. A portfolio today would need to be worth $480,000 to meet the $2000 monthly income need. That same portfolio would need to grow to $1,129,200 while paying out the income need along the way.

However much an investor put into bonds 26 years ago is how much he has today. The S&P 500's high water mark in 1980 was 140 and today it is 9.3 times higher at 1310. So in the last 26 years inflation is up 2.35 times and stock prices are up 9.3 times.

This idea is probably not new but it reiterates the point of how important equity exposure is.

It is very possible that the next 26 years will not offer the same returns as the last 26 years. The domestic returns cold be much worse. This creates the potential need for better understanding of foreign stock markets. The starting point of these decisions can be a very simple logic. The numbers are what they are and will be very similar in the future even if you have to go to other countries for those same numbers.