Stock Market - The Five Myths_4
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STOCK MARKET - THE FIVE MYTHS_4
MYTH 4: STOCKS ARE A HEDGE AGAINST INFLATION.
Stockbrokers and mutual fund salesmen have been saying for many years that stocks are a hedge against inflation. Well, they are and they aren't. It depends on how you look at it.
A true INFLATION hedge is something that goes up in value with higher inflation, like a house, or gold, or collectibles. But the fact is, inflation is the STOCK market's number one enemy. When inflation goes up, interest rates go up and two things happen. For one thing, investors say, "Golly, I can make all that money on high interest rate bonds, so why should I invest in stocks?
So they take their money out of the stock market, and stock prices go down. The second thing that happens is that the cost of doing business goes up. So, Corporate earnings go down, and stock prices go down.
Now why in the world would anybody say that stocks are a hedge against inflation? It's because you can make money in stocks faster than inflation will eat it up. All you have to do is invest in stocks with high enough earnings growth rates. When you do that, the price of the stock will go up faster than inflation. And you will be whipping inflation by staying ahead of it.
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