It is not enough to look at the overall performance of asset groups in past high inflation. The reason is that performance is largely dependent on the economic growth environment.
After all, it means that investors who are considering changing their portfolios in operation must accurately predict future conditions for two variables: inflation and economic growth to make successful investment strategy revisions. One of these ever-changing variables is difficult to predict exactly, much less predicting both.
For example, suppose there is an investor who is confident that a low growth/high inflation phase will develop over the next 12 months (but as mentioned earlier, we believe that the probability of this phase occurring is very low). Based on this conviction, investors can allocate large amounts of investment money from stocks to bonds. But if the growth rate is higher than expected, or inflation becomes as severe as it was in the 1970s, the nominal return on bonds could be hit more than stocks, resulting in negative returns. Rather, investors need to assess downside risks in the growth/inflation phase that will determine asset allocation policies and, if necessary, adjust their portfolios for better risk management without significantly deviating from long-term investment goals.
Accurate projections of not only inflation but also economic growth are essential to support revision of asset groups allocation policies due to inflation concerns, but they also need to be careful about investor confidence in economic growth and inflation prospects. Rising inflation can also affect investors’ feelings. It’s natural to be tempted to do something in the face of severe inflation. But for investors, figuring out inflation is just the beginning of the problem. Subsequent problems, namely, predicting growth in the medium term, are equally difficult. Is it really meaningful to change asset allocation to avoid the risk of falling returns?
We don’t think so. Sometimes it may be best to remain calm and to review your portfolio while continuing your current asset allocation policy.