Description
Fixed income investments are generally hit more directly by inflation. Bondholders receive interest payments for the
life of a bond. Generally, they receive their original investment back when the bond matures. If a 10-year bond pays
3.6% interest, a $10,000 investment would generate $360 of income per year.
But if inflation was at 4%, the cost of tying up $10,000 for the life of the bond would result in a net loss of buying power. As prices increased by 4%, the interest would not be keeping pace with the reduction in buying power. As an alternative to traditional bonds, some investors turn to U.S.
Treasury Inflation Protected Securities (TIPS) because they also pay a yield, but are adjusted for inflation. However, the cost of safety typically comes with a lower interest rate, and access to TIPS can be difficult with potentially complicated tax consequences. Commodities, including precious metals (such as gold and silver), have historically performed well when inflation has been high. This makes sense because commodities are the basis for many raw materials used in production and manufacturing; their prices tend to increase with rising production costs. As a standalone investment, commodities have also performed well on average regardless of inflation, especially during the global growth boom of the past few decades when there was a high demand for raw materials used in production and manufacturing.
However, when inflation hits, commodities have done considerably better than stocks and bonds, especially on a “net-of-inflation” return basis. Inflation’s Effect on Asset Classes: Performance Analysis of Stocks, Bonds and Commodities The tables to the right illustrate the performance of stocks, bonds and commodities in terms of total return and their over/under performance relative to inflation (as measured by CPI and PPI). Table 1 shows the average returns for the entire period of 1976 through 2010. Table 2 shows the average returns during the 10 highest inflationary calendar years since 1976. As illustrated, commodities not only outperformed over the long-term, but also far exceeded CPI and PPI during the 10 highest inflationary years. Table 1: Average Returns - 1976 through 2010 CPI PPI Stocks Bonds 4.0% 3.3% Commodities 8.8% 8.5% 10.3% Net Return Over CPI 4.8% 4.5% 6.3% Net Return Over PPI 5.5% 5.2% 7.0% Table 2: Average. Returns - 10 Highest Inflationary Calendar Years CPI PPI Stocks Bonds Commodities 7.4% 6.8% 6.0% 6.3% 17.5% Net Return Over CPI -1.4% -1.1% 10.1% Net Return Over PPI -0.8% -0.5% 10.7% Summary: Concerns about inflation are often accompanied by a high level of uncertainty. The good news is that periods of moderate inflation have historically been a tolerable environment for stocks.
Based on the tenets of diversification, many investors also maintain exposure to bonds and other fixed income investments for greater risk control. But fixed income instruments can struggle during inflationary periods. Fortunately, adding commodity strategies to a portfolio not only provides an additional diversification benefit, but also provides a potential hedge against inflationary concerns. Past performance is not indicative of future returns.
Historical data is used for statistical illustration purposes only and should not be used as a predictive measure for the future return expectations of any investment. The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. Both traditional and alternative investments involve risks, including the potential for loss of principal. Commodity investments may involve additional risks, including, but not limited to, geopolitical events, supply/ demand fluctuation, futures market speculation and regulatory changes.
Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. Data source: Morningstar and Bloomberg. Stock (S&P 500 Index), Bond (Barclays Aggregate Bond Index) and Commodity (S&P GSCI) index returns assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses. The indexes are unmanaged and are not available for direct investment.
The material provided herein has been provided by Arrow Investment Advisors and is for informational purposes only. Arrow Investment Advisors serves as investment advisor to one or more mutual funds distributed through Northern Lights Distributors, LLC (member FINRA). Northern Lights Distributors, LLC and Arrow Investment Advisors are not affiliated entities. 0740-NLD-4/13/2011 .
But if inflation was at 4%, the cost of tying up $10,000 for the life of the bond would result in a net loss of buying power. As prices increased by 4%, the interest would not be keeping pace with the reduction in buying power. As an alternative to traditional bonds, some investors turn to U.S.
Treasury Inflation Protected Securities (TIPS) because they also pay a yield, but are adjusted for inflation. However, the cost of safety typically comes with a lower interest rate, and access to TIPS can be difficult with potentially complicated tax consequences. Commodities, including precious metals (such as gold and silver), have historically performed well when inflation has been high. This makes sense because commodities are the basis for many raw materials used in production and manufacturing; their prices tend to increase with rising production costs. As a standalone investment, commodities have also performed well on average regardless of inflation, especially during the global growth boom of the past few decades when there was a high demand for raw materials used in production and manufacturing.
However, when inflation hits, commodities have done considerably better than stocks and bonds, especially on a “net-of-inflation” return basis. Inflation’s Effect on Asset Classes: Performance Analysis of Stocks, Bonds and Commodities The tables to the right illustrate the performance of stocks, bonds and commodities in terms of total return and their over/under performance relative to inflation (as measured by CPI and PPI). Table 1 shows the average returns for the entire period of 1976 through 2010. Table 2 shows the average returns during the 10 highest inflationary calendar years since 1976. As illustrated, commodities not only outperformed over the long-term, but also far exceeded CPI and PPI during the 10 highest inflationary years. Table 1: Average Returns - 1976 through 2010 CPI PPI Stocks Bonds 4.0% 3.3% Commodities 8.8% 8.5% 10.3% Net Return Over CPI 4.8% 4.5% 6.3% Net Return Over PPI 5.5% 5.2% 7.0% Table 2: Average. Returns - 10 Highest Inflationary Calendar Years CPI PPI Stocks Bonds Commodities 7.4% 6.8% 6.0% 6.3% 17.5% Net Return Over CPI -1.4% -1.1% 10.1% Net Return Over PPI -0.8% -0.5% 10.7% Summary: Concerns about inflation are often accompanied by a high level of uncertainty. The good news is that periods of moderate inflation have historically been a tolerable environment for stocks.
Based on the tenets of diversification, many investors also maintain exposure to bonds and other fixed income investments for greater risk control. But fixed income instruments can struggle during inflationary periods. Fortunately, adding commodity strategies to a portfolio not only provides an additional diversification benefit, but also provides a potential hedge against inflationary concerns. Past performance is not indicative of future returns.
Historical data is used for statistical illustration purposes only and should not be used as a predictive measure for the future return expectations of any investment. The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. Both traditional and alternative investments involve risks, including the potential for loss of principal. Commodity investments may involve additional risks, including, but not limited to, geopolitical events, supply/ demand fluctuation, futures market speculation and regulatory changes.
Before investing in any financial product, always read the prospectus and/or offering memorandum for product-specific risks. Data source: Morningstar and Bloomberg. Stock (S&P 500 Index), Bond (Barclays Aggregate Bond Index) and Commodity (S&P GSCI) index returns assume reinvestment of all dividends and do not reflect any management fees, transaction costs or expenses. The indexes are unmanaged and are not available for direct investment.
The material provided herein has been provided by Arrow Investment Advisors and is for informational purposes only. Arrow Investment Advisors serves as investment advisor to one or more mutual funds distributed through Northern Lights Distributors, LLC (member FINRA). Northern Lights Distributors, LLC and Arrow Investment Advisors are not affiliated entities. 0740-NLD-4/13/2011 .
