This is a chart of the S&P 500, priced in terms of eggs. Notes DeForest McDuff:
With the price of eggs going up 75% since 2001, one share of the S&P 500 used to buy as much as 1200 eggs and now it buys only 600 eggs. That’s a 50% decline in the number of eggs your stock portfolio can buy!
There are two more serious points here. The first, from McDuff:
Investment returns matter only to the extent that you can buy more "stuff" in the future. The U.S. stock market has been slowly losing real purchasing power for almost a decade, with no signs yet of a trend reversal.
It’s true that the prices of hard assets like oil, gold, and omelettes have been increasing rapidly, but this is a direct consequence of decades of underinvestment in these asset classes. If you’re not thinking about investing in terms of purchasing power, then you’re playing the wrong game.
The second comes from SAR:
Remember the good old days when Bush was going to privatize Social Security and we were all going to invest in the stock market and be rich forever? The S&P 500, adjusted for inflation, has lost 32% since then.
Most individual investors are in the happy situation of never needing to worry overmuch about the cost of eggs. Yes, the price of eggs might have gone up, but the price of iPhones has gone down; the official CPI is not understated, for these people.
On the other hand, if you’re talking about pension plans, the calculations change a lot. Many pensions belong to working-class people without other savings, who will be counting pennies in their retirement. For these people, keeping up with the price of eggs is very important, and investing in equities over the past decade has turned out to be a pretty gruesome decision.
I’m not sure if it’s possible for a pension fund to benchmark a food basket. But there are lots of fund managers out there who are responsible for the life savings and wellbeing of people who are going to spend their retirements living on low incomes. Such managers might well want to start spending less time looking at absolute returns, and more time keeping an eye on the cost of living, and how it might be hedged.