The Logic of Asset Management

Cash holdings may provide comfort, but inflation diminishes the value of uninvested cash over time. Outside of purchase delays and product substitutes, there is little more consumers can do to directly address inflation. Investors, on the other hand, have a range of options to address that potential drag. The greater the expected return of a portfolio, the potential greater success one may find in achieving financial goals, which may specifically include seeking to beat inflation. The constant caveat applies: the more return we seek the greater the risk we might not achieve that expected return: Short-term Treasury securities may offer a reasonable alternative to plain old cash. But generally relatively low expected returns may mean they at times do not keep up with inflation Stocks historically have provided among the strongest total returns across all asset classes, normally offering a substantial cushion against inflation. But stocks are volatile, and may see losses even over long periods With bond yields now at multi-decade highs, investors need not see relative safety as a zero-gain alternative to risky stocks. Still, with time, stocks may provide relative returns commensurate to their incremental risk 202309 SAM CommentaryDownload Listen to this month's Notes from the CIO podcast: Inflation: Risk of Doing Nothing Fair to suggest that a minimal expectation for any investment strategy is to maintain purchasing power over time, implying returns in excess of inflation (a positive “real” return). While that goal might seem straightforward enough, achieving it isn’t always so simple. To wit: for the better part of the last 15 years, U.S. inflation, as measured by the year-over-year change in the Consumer Price Index, ran hotter than the yield one could earn buying 1-month U.S. Treasury bills. With short-term bond yields now comfortably above latest U.S. inflation figures (consumer prices roses 3.2% year-over-year in July, versus a 1-month Treasury Bill yield of 5.3% at the end of June), investors can take on very little risk while seeking to ensure their savings maintain purchasing power. That short-term Treasury yields are higher than concurrent inflation marks a return to a relatively more normal situation: As we show in Figure 1, 1-month Treasury returns were above inflation just under three-fifths (57.8%) of the time since 1949. Investing: Risk of Doing Something Over longer periods of time, the rate of success improves. While a “most, but not all the time” success rate might fail to inspire confidence, one must