Since COVID-19 hit the world last year, millions of people around the world lost their lives as well as their livelihoods. There were shutdowns and lockdowns all over the world. The stock markets tanked quickly. The last thing on everyone’s mind was Inflation.

With GDPs of countries around the world declining rapidly, could anyone even guess that in the second half of 2021, we would start looking at inflation as a threat?

In fact, Oil prices for a brief moment had gone down below $0. Can you imagine or rather remember this?

The governments around the world were quick to react with trillions in stimulus. We thus witnessed the worst and the shortest recession in history.

Fast Forward – October 2021 – The official inflation numbers (US) as measured by CPI (Consumer Price Index) came in at a 6.2% year-over-year increase.

US Consumer spending on goods was nearly 26% higher in August 2021 than in January 2019.

Similar numbers for Inflation and Consumer spending were witnessed around the world.

While demand for goods went up significantly, supply was not equipped to handle this sudden demand with frequent lockdowns and labor shortages. So, this imbalance created a situation where prices started going up slowly at first in 2020 and then picking up steam in 2021.The US Consumer Price Index which was in the 1-2% range in early 2021 had jumped up to 5% by May and 6.2% by October 2021.

However, these are just CPI numbers. The real inflation (lifestyle inflation) is a different number altogether. Prices have shot up like crazy in many areas. Just check the price of airline tickets from India to the US. The price inflation in airline tickets is almost 100-200%.

Another example – Look at the Petrol and Diesel Prices. They have jumped up significantly. Their prices impact the prices of everything else.

Thus, Investing is a mechanism to protect yourself against Inflation.

Investing is not about Volatility or High Returns or Safety of Fixed Deposits (Fixed Income); Investing is all about protecting yourself from the Real Lifestyle Inflation Index (RLII – made up Index but a super powerful one).

People generally looked at Gold as a hedge (protection) against inflation.

Guess what – How well has Gold acted as a hedge against inflation over the last 1 year? You should not be surprised to know that Gold is down -1% in dollar terms. In short, the hedge that it seemed like it was for many no longer exists. A 5-10% allocation to Gold is the traditional rule of thumb in Asset Allocation. Guess what. It’s time for a change. Gold Bugs might not agree with this view and in fact still talk about a higher allocation to gold. By the way, buying gold jewellery for personal consumption is not the same as investing in gold (just to be clear), though many tend to make no distinction between the two.

The traditional asset allocation is itself undergoing a big shift over the last several years with interest rates on their way down. In the US and developed economies with interest rates at record lows, the traditional 60 (stock) -40%(bond) has been under question too. While every portfolio is a function of a family’s goals and needs/wants and thus need to be designed and tailor made, the following assumptions need to be kept in mind.

Inflation – at record highs (whether transitory or not)

Interest Rates – at record lows

Gold – Flat and negative, Silver – Flat (+3%)

Stocks – at record highs

Real Estate Prices – residential at record highs

Gasoline, Brent Crude, Natural Gas and Coffee – all up between 74-105%

Bitcoin – at record highs even though it has corrected from the highs made last month. I am not advocating investing in Bitcoin or Crypto. I am just making an observation in terms of the changes that are happening. A data point to know that the entire crypto asset class is now more than $3 trillion. Yes, there are a lot of shitcoins and scamcoins just like there are a lot of dabba or scam stocks, however there are some interesting opportunities in this segment. Once again, this observation is purely from an information perspective as this asset class is extremely volatile and many coins can lose value of 20-70% in a day.

Everything is up, except for Gold.

Considering all of the above, what will the asset allocation of the future look like?

More importantly, what should your asset allocation over the next 10 years look like?

Asset Allocation is all about diversification and diversification is all about reducing risk and earning an acceptable rate of return.

The acceptable rate of return for all of us is one that allows us to live the life we have imagined with our money. The acceptable rate of return is one that protects our lifestyle and ensures that we never ever have to worry about money.

Given this context, the asset allocation models of the next 20 years are likely to be different from what they have been for the previous 20.

I am curious to hear what your thoughts are.