Many years ago my oldest son took up a new athletic pursuit: longboarding. For those who are not familiar with this activity, take a long skateboard (around four feet long) and skate downhill. No, there are no brakes, etc. to stop the longboard. Gravity does all the work. Over the years my wife and I would see some of the effects longboarding can produce – scrapes, bruises and broken bones.
In 2017, my younger son took up the same sport and sometimes experienced similar results. However, when I asked my sons why they participated in this sport, they would typically respond that they enjoy the adrenalin it produced and the feeling after successfully completing a ride (I assume “successful” meant no lasting injuries).
One Saturday in 2018, both of my sons decided to go longboarding together. After my older son completed the hill, he turned around to watch his brother complete the hill. At the very bottom of the hill, my younger son turned in such a way that the longboard flew out from underneath him and his head hit the ground - hard. He was taken to the hospital and was admitted to the ICU with head injuries. The doctors were concerned that surgery would be required to relieve swelling associated with multiple brain bleeds.
Gratefully, our son made a full recovery, without the need for surgery. Yes, he spent a few months away from school and dealing with the aftereffects of the trauma, but if you didn’t know he had a brush with death, you wouldn’t suspect a thing based upon his current health.
Through their experiences, they learned there were things they could do to enjoy longboarding while minimizing the aforementioned possible negative impacts. Two keys they found was that wearing helmets/other safety gear and understanding their limits minimized the pain and suffering.
Recently I was thinking about one of the painful economic challenges that we are experiencing at this time – inflation. Currently we experience inflation in many of our common purchases. Our personal painful experience with inflation, including our ability to save, make prudent financial decisions and plan for our financial goals may be likened to the scrapes, bruises and yes, even broken bones of my sons and their longboarding decisions.
Inflation can be challenging to deal with. We have dealt with it in the past and, even after this bout of inflation is under control, at some point in the future we will deal with it again. The big question many ask themselves is whether they will financially fully recover from the inflation we all are currently experiencing.
While we cannot predict how quickly the Federal Reserve will be able to rein in inflation (through interest rate increases, reducing the economy’s monetary supply, reducing the Fed’s balance sheet through bond sales, etc.), we can look back at the last 30 years and see how the stock market performed in various inflationary periods.
According to the following exhibit, from 1991 through 2020, the S&P 500 posted an average annualized return of 8.5% after adjusting for inflation. Going all the way back to 1926, the annualized inflation-adjusted return on stocks was 7.3%.
History shows that stocks tend to outpace inflation over the long term – a valuable reminder for investors concerned that today’s rising prices will make it harder to reach their financial goals.