Meflation

I had saved this article from The Wall Street Journal last September, figuring that it would be a good launching point for a post.  Jason Zweig quotes Larry Swedroe, director of research at Buckingham Asset Management, with the central message of the piece: 

"What matters isn't whether somebody's forecast for inflation or deflation is more convincing to you.  Instead, what matters is which of these risks would be most damaging to you."

Zweig goes on to compare the extremes of two investors.  A young professional with a stock portfolio and  mortgaged home will do OK in an inflationary environment, but could be devastated in a deflationary one.  On the other hand, the retiree on a fixed income, a balanced portfolio and a home that has been paid off is at great risk that inflation will erode the purchasing power of his income and savings, but will welcome deflation.  How my standard of living will be affected by a scenario, the "Meflation," is more important than the precise measurement of the scenario.

This is not particular news to the professional advisor; it is likely intuitive.  My point in raising it again is to connect it to the Investment Policy lessons of Charles Ellis.  If the primary objective of the investment portfolio is to ensure sufficient income to maintain a living standard in retirement, positioning the portfolio to protect against the ravages of inflation is more important than outperforming the S&P 500 by 100 basis points.