In this last blog post on the subject (we can only hope), let’s again look back at the 70s and 80s to get some perspective on what happened during a decade long bout of stagflation. The stock market was a roller coaster, and the Dow Jones Industrial Average, which was worth 809 in 1970 grew to only 839 by tDecember 1979. Existing bond holders saw a world of pain, as their steady payments didn’t keep up with the cost of goods and services due to inflation, and their net asset values declined.
In fact, here’s a rule of thumb about bonds: for every 1% increase in interest rates, the value of the bond (or bond fund or ETF) will fall by a percentage equal to its duration. For example, if you hold a bond fund with an average duration of 10 years, and rates increase 1%, you could expect the market value of your fund to drop about 10%.
So what worked then, and what might work now (if we enter a prolonged, say even 5-year, inflationary phase)?
Investors in real assets did very well. Farmland, for example, went from $137 / acre in 1970 to $737 by 1980. Agricultural commodities did well: corn prices almost tripled, and beef prices more than doubled. But if you fed your beef corn to get them ready for market, that didn’t work out as well as it sounded. And if you needed diesel fuel for your tractors to plow, seed, and harvest your corn… well, again, not as great for the real producers perhaps as for the speculators in the futures markets.
Real estate though: a solid performer. Especially in high growth regions. California’s RE prices tripled in value. Think about today’s Sunbelt growth. But, in some parts of the country, governments imposed rent controls, limiting how much landlords could increase tenant rents. Which left many landlords with sub-performing assets, and a depressed property value.
So, not all real estate played out successfully. Take note though: high growth areas, and investments protected from rental controls.
As materials costs rise, as do construction costs, with growing uncertainty about project timelines due to scarcity of some trades, vertical projects, while consistently a strong investment, may face increased volatility and pressure on returns.
It kind of sounds as though a land acquisition strategy in the high-growth Sunbelt region might be a useful approach.
Just as investors seek to diversify portfolio risk by addressing multiple stock market segments or international regions, or by mixing bonds into their portfolios, real estate investors might consider diversifying their portfolios to include land acquisition projects. These may be a highly inflation resistant, low volatility, growth opportunity. At lease we at OptIn Ventures believe so.
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