Thursday, November 7, 2013

Stocks as a Long-Term Hedge for Inflation

This morning I've been playing around with the Dimson-Staunton-Marsh Global Returns dataset for 20 developed market countries (1900-2012) to try and look more at how stocks and bonds have performed historically with respect to inflation over long periods of time. This discussion is a follow-up to my earlier discussion of William Bernstein's e-book Deep Risk.

Actually, I've tried a lot of different things, but I'm not coming up with any really good ways to present the data. What is clear is that both stocks and bonds are risky, even over long periods of time. However, when there is high inflation, stocks do look to be a bit less risky. Essentially, bond investors can be wiped out by inflation.

What follows are two tables I've made which combine the financial market data for the 20 countries.

First for 10-year intervals and then for 20-year intervals, I separate the data by the compounded inflation rate for all the rolling periods of that length in the dataset. Then I provide information about the cumulative inflation-adjusted gains (or losses) for stocks and for bonds categorized by the different inflation levels. 

What do you think?  Is there a case for saying that (at list in historical data) stocks are less risky than bonds over 10- and/or 20-year periods?