Stagflation Is Here to Stay, How To Invest?

Back in the 1970s when stagflation took hold the world looked a whole different than it does today. Landlines have been replaced by mobile phones. TVs have been replaced by streaming apps. Records have been replaced by Spotify. But one thing that hasn’t changed is the definition of stagflation, a period where inflation rises at a more rapid pace than the economy.

The inflation of today is largely demand-based meaning a lot of stimulative measures, whether debt forgiveness or loan programs during COVID have resulted in a flush consumer pulling demand forward, and snapping up goods that would otherwise have been purchased at a later stage. This is a tectonic shift to the supply side inflation increases of the past 3 decades.

Regardless, the outcome is the same, inflation is running rampant, and consumers are struggling to play catch up. While the initial stimuli meant they felt like they had fat wallets, the spending has come and gone, and now inflation is here to stay with gyms hiking monthly membership rates and coffee shops boosting per cup serving costs. All of it is leading to a struggling lower income class hurting more. The middle classes are increasingly feeling the pinch too.

So how do you protect yourself from the onslaught of rising prices?

Key Points

•  Stimulative measures have inflated spending, disproportionately affecting lower and middle-income groups.
• Investors favor assets historically resilient to inflation, like stocks and commodities.
• Buffett’s move into oil reflects this trend. Yet, regular contributions to broad index funds, like the S&P 500, offer stability amidst volatility.
• Amid sector uncertainty, a dollar-cost averaging approach into a diverse index fund remains a reliable strategy, providing long-term stability amidst market fluctuations.

Where Should You Put Your Money?

The answer as to where to allocate capital in an inflationary environment is not so simple. At first glance the obvious answer may be bonds, that pay a higher interest rate than they have for the past 15 years or so, why not keep pace with inflation by allocating capital to an interest-bearing account?

The reality however is hard assets usually keep pace best at these times with inflation. The price of gold is massively higher in nominal terms than 100 years ago but in real terms it’s about the same. Tangible assets simply reflect the value of the times, and that means investing in stocks, real estate, or commodities it the place to be, if history is a guide.

It’s no surprise to see astute investors like Buffett go heavy into oil at a time when most were shunning it. His bets on Chevron and Occidental Petroleum may be a nod to a broader view that stagflation is taking hold and commodity prices are going to rise. If the price of oil per barrel goes up, expect those two energy giants to prosper even more than they already are.

1 Place to Park Capital

If you’re not sure where to park capital, consider the tried and tested proven advice that has held firm over the past few years, and even decades, a regular contribution to the S&P 500 via a staple index fund, such as Vanguard is likely the best way to go for the long-term.

Whether it’s oil or a resurgent AI technology boom that prospers, a simple dollar cost averaging approach to investing your capital is going to outperform most stockpicking endeavors.

At a time when it’s hard to know whether to invest in artificial intelligence or art, the broader based index is the safest haven bet there is. Sure, it’s going to be volatile at times too, but absent some nuclear explosion the odds are all 500 companies in the US are not going to zero simultaneously so you can be confident in the long-term.