4 Tips on How to Beat Inflation. Stock Market Performance Between 2020 and 2024
As of April 2024, the stock market was down 5% and inflation is still up 3.4%. Although the market recovered since, day-to-day life has become unaffordable for most Americans. In 2024, money isn’t cheap anymore; proving that financial illiteracy is expensive. At this rate, your knowledge or financial awareness equals your family’s future purchasing power. If you want to compete in modern times, it’s now mandatory to invest.
Investing $100 in the S&P 500 at the beginning of 2020, you would have about $145.67 at the end of 2023, assuming you reinvested all dividends. This is a return on investment of nearly 46% percent, or an annualized average return of 10.8% per year. But that’s just the nominal value. Over the same period, Americans faced an 18.3% cost inflation increase (or a 4.6% annualized average). The real performance value was an annualized 6.2% for investors.
During the same time, the TNFG household pulled in a record 54.35% or 13.6% annualized average. An adjusted real performance value of 9%. How did we pull the additional +3% over the average American household?
Here are the four strategies we take advantage of; 1. Cash Flow Management, 2. 25 percent of Gross, 3. Dollar-Cost-Averaging, and 4. Business Cycle Investing.
Table of Contents
How Inflation Erodes Wealth
To begin with, inflation is the gradual increase in prices over time, which reduces the value of money. If you have a fixed amount of money (income), you will progressively be able to purchase less goods with your time.
Due to this spike in inflation since 2022, the majority of Americans are feeling poorer. Gone are the days of discretionary spending, and welcome the age of austerity.
Along with interest rates, housing prices have increased, making it difficult for people to find affordable places to live. Consumer debt has increased as household savings have decreased. As of June 2024, nearly 3.2% of credit card and auto loans have gone into delinquencies. Many people who work full-time or multiple jobs still don’t feel like they earn enough to make ends meet. Toss in increases in daycare, healthcare, and energy; it’s a toxic gumbo of feeling bad about money while watching others spend on social media.
As you can see from graphic #1, even if we manage to slow down the rate of increase (inflation) down to 2%, prices are still a long way from prices in 2019. Transportation is up 18%. Shelter is up 13.8% while food is up 8.2%. High inflation is costing Americans an extra $1,069 a month, compared to 3 years ago.
Real Performance vs Inflation-Adjusted Performance
The table below shows the full dataset about a $100 investment, including gains and losses between January 2020 and June 2024.
| Year | S&P Return (%) | Inflation Rate | Return – Inflation | TNFG Return (%) | Real TNFG – Inflation | TNFG Advantage vs S&P Perf. |
|---|---|---|---|---|---|---|
| 2020 | +16.26% | 1.40% | +14.86% | +20.89% | +19.49% | +4.63% |
| 2021 | +26.89% | 7.00% | +19.89% | +20.73% | +13.73% | -6.16% |
| 2022 | -19.44% | 6.50% | -25.94% | -14.96% | -21.46% | +4.48% |
| 2023 | +24.23% | 3.40% | +20.83% | +27.69% | +24.29% | +3.46% |
| *2024 | +14.48% | 3.20% | +11.28% | +42.17% | +38.97% | +27.69% |
| Total Returns | +62.42% | 21.5% | +40.92% | +96.52% | +75.02% | +34.10% |
| Avg. Annualized Returns | +12.48% | 4.30% | +8.18% | 19.30% | +15.00% | +6.82% |
*Period Ending June 30, 2024
Cash Flow Management Beats Inflation During Every Period
Money comes in, and Money goes out.
It doesn’t get any more complicated than this. Cash flow management is the process of tracking and controlling the flow of money in and out of your household to ensure it has enough funds to cover fixed financial obligations.
The biggest fixed obligations often include total housing costs and food. They may also include recurring debt expenses such as credit card bills, auto loan payments, student loan payments, and medical expenses. After that, you should also have enough to pay living expenses. And, most importantly, you should retain enough dollars to invest.
Most American households spend at least 75 cents of every dollar earned on Housing, Transportation, and Food. This leaves just 25 cents of every dollar to cover taxes and other lifestyle expenditures.
My household spends about 13% on housing (+rental), 6.8% on transportation, and 4% on food. A total of less than 25 cents of every dollar earned.
While there is merit in reducing unnecessary and unused expenses such as subscriptions. Those can amount to a saving of $200 per month. Making bigger and more impact decisions like where you live can drastically cut down your expenses.
It comes down to preference. Cash Flow management can help you beat inflation by becoming more efficient with your dollars. While you lessen your consumer debt burden, it will also reduce your total monthly interest incurred.
In a high inflationary cycle, debt drains.
25 Percent of Gross = Investment Wealth
Housing is a make-or-break factor for families. If you rent for too long, you might be pricing yourself out of ownership for a lifetime and it’s going to cost your children.
As inflation rises, sales prices of homes increase. To make matters worse, as the Federal Reserve attempts to correct high inflation, it raises Federal interest rates which increases mortgage interest rates too. Getting pre-approved for a mortgage loan becomes challenging. While there is a finite amount of space to build “desirable” housing, the population of the US continues to grow. As Boomers hold onto homes longer, millennials are stuck waiting as prices escalate beyond repair.
However, if you are in a position to own, remember the golden rule. Never pay more than 25% of your take-home pay in total housing cost. Once you tip over that scale, the first thing that goes is your savings rate to compensate. Americans are saving less than 8% of their pay, and that’s going to cost them in the long run.
Dollar-Cost Averaging to Beat Inflationary Lows
Dollar-cost averaging is an alternative to investing the full lump sum of $100.00 up-front.
Instead, the capital is invested over a period. Consider a strategy in which $100.00 was invested in the S&P 500 over no more than 24 months beginning in 2020. This would result in a final amount of $128.86, including dividend reinvestments. In this case, dollar-cost average returns are less than the returns of a lump-sum investment (which ends at $145.67).
But it’s still the easiest way to pull solid returns without the stress of timing the market.
When stocks go down, people often get scared and SELL. Then, when the market goes back up, they might miss out on potential gains. Inversely, when the stock market goes up, investors might be tempted to rush in and trail the news. Those investors could end up buying just as stocks are about to drop or worse when prices are way too high.
Dollar-cost averaging can help take the emotion out of investing. It compels you to continue investing the same (or roughly the same) amount regardless of the market’s fluctuations, potentially helping you avoid the temptation to time the market.
Business Cycle Investments to Generate Greater Wealth Odds
Fidelity defines the business cycle approach to sector investing “through the uses of probabilistic analysis to identify the shifting phases of the economy.” That’s nerd talk for weighing which sector will outperform or underperform.
A business cycle (or economic cycle) has four phases: expansion, peak, contraction, and trough. While they may be hard to predict, the average full economic cycle lasts roughly five and a half years. By anticipating and acting on changes in the cycle, an investor can profit from the upswing of a recovery or the downtrend of a recession. Think of it like buying ice cream supplies in the winter when costs are down due to demand. Or better yet, buying holiday supplies off-season. The best prices for Valentine’s Day are the day after (for example).
As of August 2024, the real estate sector is the lowest performing which Information Technology has been carrying the game. Investors may interpret that as a buy now when prices are reduced. Something we witnessed at the start of July with the sector plays from Tech to anything else. All to say you have to stay active if you want to win.
Bonus Share – Worth listening (April 2024)
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