28 Aug 2018
Am I right to worry about higher inflation? Followers of our funds and my writing will know that we have been reducing risk in anticipation of inflation becoming a problem over the next 1-2 years. There is a sound basis for this stance, but it is one we keep under constant review.
There are two aspects to this question about inflation. First, should one in general worry about high inflation? If yes, should one be worrying about it right now?
As to the former, a Mr Bill Bengen has the answer. Bengen was an MIT-trained aeronautical engineer turned financial planner who in 1994 wrote a paper titled “Determining withdrawal rates using historical data”. His approach was empirical not theoretical, looking at how balanced funds performed during 20 year periods since 1926 given a certain equity/bond proportion and a certain withdrawal rate.
Part of the analysis involved looking at the effect on portfolios of the three major financial events during the period under review, which Bengen called “Little Dipper” (1929-1931), “Big Dipper” (1937-1941), and “Big Bang” (1973-1974).
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