Myth: High inflation is a good reason to pause investing.

For the reader: When I say market, I am referring to the S&P 500. When I say risk-free rate, I am referring to the rate of a 3-month Treasury Bill. 

It seems like there are a ton of reasons NOT to invest right now. We have what seems to be stubborn inflation, a decent risk-free rate (relative to the last 10 years), and massive conflicts happening across the globe. I’ll start with this, there is always a reason not to invest. There will always be doomers, people constantly predicting market crashes, geopolitical issues, etc. The list goes on and on.

For today’s piece, we will focus on inflation and relatively good risk-free rates. I wanted to go back in time to when inflation roared. The 1970s experienced an average inflation rate of 6.8%, which is roughly double what we are clocking these days. Risk-free rates were relatively good, ranging from 4.07% to 10.05%.

So, I figured that would be a good way to gauge how stocks performed relative to 3-month Treasuries. I took the average 3-month Treasury yield and assumed investors got that rate for the full year, essentially rolling their bills every 3 months upon maturity. Then I compared it with the return of the stock market.

At the end of 1979, the risk-free investor who started with $1,000 ended with $1,842, and the stock investor ended with $1,767. So yes, the risk-free investor won in this scenario, especially when we consider that they were putting zero risk on their money.

But let’s take a look at what happens if each investor contributed $1,000 at the beginning of each year after the first year. The risk-free investor ended up with $14,522 and the stock investor ended with $14,723. This is a nominal difference and on a risk-adjusted basis (calculating the excess reward expected from taking risk), the risk-free investor wins again.

This is a relatively short time frame. Especially when considering young professionals likely have time horizons of 30, 40, or even 50 years. So, I went ahead and calculated the same for the next ten years.

This is when the stock investor really reaps the rewards of putting risk on their capital. In the first scenario ($1,000 invested and nothing added), the risk-free investor ends with $4,290 and the stock investor ends with $8,899. More than double! Generally, we can expect to earn more over the long haul by putting our money at risk. Given we are so young, we can also afford to put more risk on our money as we can recover from poor years in the market.

Now, when we compare the risk-free investor to the stock investor each adding $1,000 at the beginning of the year you really start to see the power of compounding. The risk-free investor ends with $49,376 and the stock investor ends with $101,885.

Again, more than double the risk-free investor coming off incredibly high inflation that lasted throughout the 1980s. The average inflation rate during the 1980s was about 3.5%, which is right around where we are today.

Sometimes it is hard to say, “Just set it and forget it” when it comes to investing. Putting a little math to it, especially under the circumstances in the 1970s and 1980s might help visualize that generally stocks go up.

The media focuses on seconds, minutes, and hours. We are focusing on years and decades. The US stock market has been resilient over the past 100 years. I am willing to bet that will continue. 

It’s tough not to get caught up in the financial media. They’re covering everything; from the latest all-time high to the one-day sell-off to the CPI reports. None of these things should affect the way we invest with a 30+ year time horizon.

I’ll end with this: “Your money is like a bar of soap – the more you handle it, the less you'll have.” - Eugene Fama

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