Equities – Hedging Against Inflation & Tax

Equity Article Image
Equities, in the long run, have beaten every other asset class including bonds, FDs, Gold, etc.

Equity is a wonderful hedge against inflation for a few reasons.

Since 1928, the U.S. stock market is up 9.8% per year while inflation has averaged 3% per year. So stocks have grown at nearly 7% more than the rate of inflation.

One of the reasons for this is that earnings and dividends also grow at a healthy clip above inflation. Over the past 93 years, earnings have grown at roughly 5% per year. Stocks also have perhaps the greatest income stream of any asset.

Dividends have grown at roughly 5% per year. While on the other hand, the US 10 year govt bond currently yields just around 1.63 % which is very hard to beat the inflation rate. In India 10 year govt bond yields around 6 % which again is low when inflation is considered in India.

Look below at table no 10A.

This table makes it clear which asset is best fit to hedge against both inflation and tax. Suppose two friends invested in equity and debt respectively for 10 years. Debt investment gave a return of 8% while equity gave 15%. And inflation is expected to be 5% each year but after deducting inflation, the real return gained by both the friends varies drastically.

Similarly, when we look at years it will take to double your purchasing power, It is 70 years in fixed deposit while just 8.4 years in equities.

Equities, in the long run, have beaten every other asset class including bonds, FDs, Gold, etc. Hence, through this we conclude that equities have helped investors beat inflation and also have increased their purchasing power.

This is why we recommend everyone to have some exposure in equities as well.