could the stock market be safer than cash?

[KTP]

With the national debt spiraling out of control, is it possible that over the next 10 years we will see a huge inflation rate? It would seem to me that one of the ways to manage the huge government debt would be to print money, which would devalue the dollar, make current debt a smaller part of the GDP, but would drastically increase inflation.

If you have 100,000 in cash earning 2% and the inflation rate has climbed to 10%, you are losing 8% a year.

If you have 100,000 in large cap stocks, perhaps companies who have tangible assets working for them, then wouldn't the share price increase on pace with inflation? I am certainly not an economist, but it seems that a company is just going to try and pass the increased costs on to the consumer.

The question would then become, which companies are best protected against high inflation while still earning a decent return during times of moderate inflation.

[Joan.of.the.Arch]

That makes sense to me.....Sad.

It just seems wrong having an economy where you have to be in the stock market in order to survive. There are so many people who are left out, who are intimidated, afraid, uneducated to the matter, or even whose religion tells them not to participate in interest-paying schemes. Inflation!

[disneysteve]

There are some flaws in your thinking. As inflation rises, bank/MM interest rates would rise as well. Back in the 80s when inflation was in double digits, interest rates were also in double digits. CDs were paying 12 or 13%.

As for stocks, as inflation ramps up, the costs of doing business rise, too. That puts a big crimp on earnings and weighs down the share prices.

Your last sentence, though, is a good one. There are companies and industries that are less sensitive to inflation pressures than others. Retailers, for example, get hit harder by inflation since customers buy less as prices rise. Service providers tend to do better because people will keep using a necessary service regardless of price increases, like utilities. People can't stop using electricity or water. People keep getting medical treatment and taking prescription meds so healthcare tends to make out better.

[Broken Arrow]

I do agree with the basic premise....

There are two basic ways to beat inflation.

The first is to invest in instruments that specifically adjust with inflation.

The second is to invest in equities that will out-pace inflation.

The down side to the first method is that, inflation aside, they usually don't give much back in return. So, while inflation protection is perhaps guaranteed, your purchasing power increases by very little.

The down side to the second method is that, there is market risk involved. So, while your purchasing power may increase, perhaps even substantially, there's no guarantee. In fact, there's no guarantee that one will even out-pace inflation. In fact, in some down times, you even risk losing money.

So, which is the better method? Well, that goes back to that basic advice about diversification. Perhaps it's wiser to put a little bit of money into both.

For what it's worth, I do think the best thing to do is to keep it simple whenever we can. If our direct concern is inflation, just buy inflation-protected bonds or bond funds. If we are interested in growing our portfolio, then let's just put the appropriate amount of money into equities.

That's my $0.02 anyway.

[sk24iam]

The stock market may be safer than cd's... According to the 2008 Bureau of Labor Stats, the avgerage rate of inflation over the last 100 years is 3.2%. Lets say your at 30% tax bracket. A 5 yr CD was paying out 3.1%. The tax rate takes your gains 3.2% to 2.17%. Inflation takes your 2.17% profit down to losing money at -1.03% annually. CDs actually makes people lose money lots of it in the long run. Just to break even on 3% inflation rate, you would need a CD to pay out 4.3% if you're in the 30% tax bracket.

[Aleta]

My step-father made over 14% on CD's in the 80' s which really pushed him ahead on his personal and retirement savings. He also lived very frugally during those times as well.

[zetta]

The stock market could be safer than cash over the next 10 years...or it could have a decade like the 70's where it essentially stayed flat the whole time. Nobody knows. That's why it is considered riskier than things like bonds and CD's. I agree that diversification is key.