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    A quick look at inflation over 48 years

    JP Morgan produce a detailed report on the annual returns from the different asset classes. The data goes back to 1960 and so gives an investor a longer term perspective. Investment performance is naturally a key objective for all investors. Accurately measuring return and comparing to both benchmarks and risk is an important and ongoing task.

    The historical performance data across multiple asset classes is a crucial element in determining an appropriate asset allocation strategy. Because it’s historical in nature, it’s not the only element, but a good start.

    The report makes the following comment about diversification, “Given the varying returns, the different risk profiles and the lack of certainty that historical performance will be repeated in the future, “betting the farm” is rarely worth the risk.”

    Looking back at numbers over a 48 year period, its naturally easy is to justify a 100% weight to equities. However only when you start to look at the detail, is it evident that no single asset class outperforms each year. This is where the benefit of diversification comes into play.

    There are some interesting facts that emerge from the study and I will take a couple of reports to cover these. Firstly let’s look at the bare minimum hurdle rate for all investments, namely inflation.


    Throughout the 1960’s the official inflation rate was low. 1,6% in 1960, 1% in 1963, but slowly starting to pick up into the late 1960’s where it reached 4,8% in 1970.

    Then the oil shocks of the 1970’s kicked in and inflation started becoming a problem. 7,4% in 1972 and then 9,9% in 1973. In that year, neither equities, bonds nor fixed deposit returns could beat the almost 10% inflation.

    This was repeated in 1975 and 1976 when inflation touched 11,9% and equity returns came in at a negative 12,3%.

    Inflation continued heading up into the late 1970’s, recording 15,8% in 1980, as the price of gold made then record highs.

    Inflation persisted throughout the 1980’s as the rand depreciated, foreign corporates left the country, and government debt became a problem. In 1985 inflation ran at 18,4%, but in that year at least equities produced 41%.

    It was only into the early 1990’s with Chris Stals implementation of positive real interest rates, that the back of inflation was broken. Other factors came into pay such as an opening up of the economy, the China impact. And so double digit inflation came down to 2,2% in 1999 and 3,4% in 2004.

    On a 5 year rolling basis then inflation over the last 10 years inflation has been under control and reminiscent of the 1960’s. Average inflation came in at 5% for 2002 – 2006 and 4,4% for 2003 – 2007.

    The question now is have we seen the best years from an inflation perspective? If inflation is picking up, how did various asset classes perform in previous high inflationary periods?

    We will explore this in the week

    Kind regards

    Ian de Lange

    Permalink2008-05-05, 19:29:53, by ian Email , Leave a comment
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