By Darren Withers

Anyone that has checked out a clothing store or the music charts lately might be mistaken for thinking it’s the 1980’s all over again. From mullets, to high waist jeans to Kate Bush topping the music charts, we appear to be reliving the “greed decade”. But it’s not just fashion and pop culture where 80’s trends are staging a comeback.

Until recently, high levels of inflation have been something not experienced for decades. In the 25 years to June 2022, the average annual rate of change in the Australian CPI (Consumer Price Index) was just 2.6% pa.

By comparison, the inflation rate for the 80’s was a staggering 8.3% pa. To put this in context, $1,000 in 1980 would only have purchased the equivalent of $450 just a decade later.

With the latest annual inflation rate coming in at 6.1%, how will this impact retirement strategies? During a period of rising costs, retirees need to see their incomes increasing, as well as growth in the capital value, so their money maintains its purchasing power.

The only way to achieve this is to ensure that an appropriate asset allocation is put in place. While holding cash and term deposits can buffer you from volatile markets, they are not an effective protection against inflation. Higher inflation often leads to better interest rates, but the purchasing power of the capital will be eroded.

To have inflation protection, a portfolio needs a good core in assets where the capital value and income produced grow at a rate in excess of inflation. We typically refer to these as growth assets. The only assets that fit this definition are shares, property and infrastructure.

This is well reflected by the Sydney property market. During the 80’s the median house price more than doubled from $76,500 to $184,600. This represents an increase of 9.2% pa, and a return of nearly 1% above inflation.

The pattern also exists in the share market. Despite the October 1987 crash, the average annual growth rate from Australian shares was 12.7% pa. So, long term investors in the 80’s earned a capital return of 4.4% pa above the inflation rate. Dividends also similarly increased over the decade.

From this you can see that a strategy which provides a decent exposure to growth assets will offer the capital protection needed to combat inflationary pressures. However, a higher inflation environment can often be a volatile one for the share market. While the All Ordinaries Index ended the decade up 122%, it was highly volatile, with the 1987 crash wiping 49.2% off share values. So having an adequate defensive buffer to ensure retirement needs are met without being a forced seller of growth assets is essential.

The right mix of growth and defensive assets will differ depending on personal circumstances such as level of capital, desired income, personal goals and tolerance to risk.

Just like the 1980’s we are again listening to Kate Bush singing about running up that hill. And, if we aren’t properly invested so our portfolios can run up the inflation hill, then we might find ourselves tumbling down the other side.

To review your investment strategy, please speak to an Elston adviser.

If you would like more information please call 1300 ELSTON or contact us.