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It's rare to find trustworthy research proving what's profitable (and what's not!!) for investing during inflation, deflation, and stagflation regimes.

It's a hard topic to research because the amount of data required makes it difficult and expensive. But this academic study spans 1875-2021, plus it includes multiple countries (not just U.S. data) to derive valid conclusions across a broad, statistically significant sample.

However, the bad news is it's academic-level research, so it's a tough slog to read. You can trust the validity of the conclusions (which is good), but It's not a page-turner. Sorry.

With that said, the insights this research piece delivers are pure gold. It's well worth your time.

If you care about your portfolio then please make the effort to understand what's in the research paper I'm sharing today. The conclusions can make a difference in your financial future. Given today's inflationary/stagflationary environment, it's a must-read.

Below are some highlights:

• "Investors have become accustomed to low and stable inflation in which real returns are close to nominal returns." (Yep! That's how the prior epoch for the past 40+ years worked.)
• "Equities and bonds on average yield lower nominal returns during periods of high inflation, causing negative real returns." (Translation: The investment strategy that worked so well for the past 40+ years will likely lose money during this new epoch.)
• "By contrast, factor premiums are generally consistently positive across inflationary regimes, displaying generally no significant variation." (Translation: A different investment strategy, based on factor premiums (momentum), is the historically proven, most reliable investment solution for this new epoch we just entered.)
• "The periods of stagflation are truly bad times with nominal equity returns averaging negative 7.1% per annum, yielding double digit negative returns in real terms. As such, factors (like momentum) help to offset some, but not all, of the negative impact of high inflation in recessionary times."
• "Over the entire sample period (1875-2021) there have been 23.1 years of deflation and 46.1 years with inflation above 4%." (Notice how more than 30% of history delivered inflation greater than 4%. That shows you how our new inflationary epoch isn't nearly as uncommon or unexpected as popular media portrays. Worth noting is how there's no historical example where inflation has been beat without the Fed funds rate rising above the inflation rate. Given that the Fed is currently nowhere close - not even warm - to achieving that outcome, it implies you should expect inflationary problems for a while.)
• Table 2 and other resources in the article show how momentum is the most robust, stable factor for investing for a positive return during inflation, deflation, and stagflation regimes. This is exactly what I've been telling you for 9 months. The actionable, cost-efficient, time-efficient solution to put these insights to work for your portfolio is here.
• Table 3 shows how passive strategies (buy and hold) lose money in real terms (net of inflation), and how momentum delivers positive real returns.
• "Momentum is the strongest (factor) over the sample since 1875 with 7.4% average return per annum." (Note: this research uses a simple 12 month momentum filter. The models on Allocate Smartly that I teach you about in my free education series are DRAMATICALLY superior to this over-simplified model used in the research. In other words, the expected performance improvement over passive buy and hold for the Allocate Smartly models I teach you should exceed what this research is showing.)
• Figure 4 is a must-see if you're still using buy and hold passive investment strategy in this new epoch. Check it out. Eye opening.
• "Factor performances (momentum) do not seem to depend much on level of inflation, in contrast to asset class returns." (Translation: Passive buy and hold investment performance is highly sensitive to the level of inflation, but momentum investing is not. That's why it's the stable, reliable alternative for this epochal change.)
• See Figure 5 showing how momentum performs reliably across every regime - whether deflationary, moderate inflation, or extremely high inflation. (The key point is how nobody knows exactly how this epochal change will unfold, except that it will be volatile for a decade or more. That means you need a reliable investment discipline to manage for the unexpected. And again, please remember that the momentum model they use is crude so the results they're showing in this research understate the true potential advantage. I expect specifically chosen models at Allocate Smartly to do better.)
• "Real returns on equities are particularly bad during recessions with high inflation, stagflationary episodes." (Gee! That's exactly the environment we're in right now. Sound familiar?)
• "The negative real return for equities of -16.6% suggests that equities are a particularly bad inflation hedge during stagflationary periods." (... and of course, stagflation is the epoch we just entered 6 months ago with GDP declines and record inflation! You might want to do something about it, right?!?)
• "Investors who are worried about achieving negative real returns during stagflation periods may improve their asset allocation by including factors (momentum) across asset classes. This would help their portfolio to a certain extent from these adversary business cycle conditions." (Agreed! I've been advocating the exact same thing for 9 months now!! It's nice to see that the academics now agree with that conclusion. The horse may be out of the barn, but it hasn't run away yet, so there's still time to take action.)
• "We can conclude that the most severe bad times for investors in traditional asset asset classes are times of high inflation with either economic or earnings downturns, rising rates, falling equity markets, or rising inflation, or deflationary bear markets, and factor premiums (momentum) on average help to alleviate the pain during these periods." (Note: They're describing the exact conditions we face today and the exact investment solution I've been telling you about for 9 months.)

Investing in Deflation, Inflation, and Stagflation Regimes - Baltussen, Swinkels, and Vliet

This is the academic research highlighted above. It's timely, relevant, and pure gold. Learn what these researchers say about intelligent investment strategy for this epochal change. It's knowledge that will pay you. And if you decide to put the lessons from this research into practice, here is my recommended solution. It makes the entire investment process turnkey easy by taking care of data management, number crunching, and more. Once you set it up, it takes less than an hour a month to manage your portfolio. My Expectancy Wealth Planning community has been using this solution for more than two years and loves the results. You can too.

Father of 4% Rule Urges Caution and Raises Cash as Market Risk Rises - Think Advisor

I chuckled when I read this article, even though it's not funny. I find the irony humorous how the big-names in the investment research business don't use buy and hold for their own money even though all of their research is built on that strategy. And yet, here we are. Bill Bengen is using Investech (I've seen their tactical asset allocation models (TAA), and they're statistically similar to what I'm advocating for you here.) to manage market risk during this epochal change. If TAA is good enough for the father of the 4% Rule, then maybe you should consider similar for your portfolio?

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