Inflation is one of the great enemies of conventional portfolio design, because it can damage both sides of the traditional stock-and-bond mix at the same time.

That is the central problem addressed in “The Best Strategies for Inflationary Times,” a paper by Henry Neville, Teun Draaisma, Ben Funnell, Campbell Harvey, and Otto Van Hemert. The authors examined data going back to 1926, including inflationary episodes in the United States, the United Kingdom, and Japan, to answer a practical question: what has actually protected buying power when inflation becomes a serious problem?

The paper’s U.S. summary table covers eight inflationary regimes. The broader study identifies 34 inflationary episodes across the three countries. Either way, the conclusion is uncomfortable for investors who assume that a conventional portfolio will naturally preserve wealth through every environment. Stocks did poorly, and bonds did worse.

During the US inflationary regimes studied, equities produced a negative real return of roughly 7% annualized, while 30-year Treasuries lost roughly 8% annualized after inflation. Inflation can  compress equity valuations, pressure margins, and destabilize the economic assumptions that support long-duration assets.

Gold did what gold is supposed to do, but with an important qualification. The paper shows gold with a strong positive real return during inflationary regimes, while doing very little outside them. The historical data do not support treating it as a magical, all-purpose store of value that compounds reliably in every regime.

Commodities were stronger. The commodity aggregate produced positive real returns in every one of the eight U.S. inflationary regimes, averaging roughly 14% annualized after inflation. Energies were especially strong, though obviously more volatile and more concentrated than a broad commodity basket. This result makes intuitive sense, as inflation is often visible first in the prices of real inputs: energy, metals, agricultural goods, and the raw materials that move through the economy before showing up in finished goods and wages.

Trend following stands out.

Across the US inflationary regimes, the paper’s all-asset trend-following strategy produced the highest real return, roughly 25% annualized, with positive real returns in every inflationary episode. The authors’ explanation is that inflation shocks usually do not arrive and disappear overnight. They tend to unfold over time, becoming regimes rather than single events, and that gives trend-following systems time to adapt as different asset classes respond.

That point fits the experience of the 2020s. Inflation did not hit every asset at once. Real estate and speculative assets moved first. Bitcoin and other risk assets had their moment. Bonds then suffered one of their worst drawdowns in modern history as rates adjusted. Stocks recovered later, gold eventually broke higher, and energy prices have had their own cycles. Inflation has been a rolling regime that moved through markets unevenly.

Broad, rules-based diversification matters.

A portfolio built around a single inflation forecast can be just as faulty as a portfolio that owns only stocks and bonds. If you only own gold or commodities you may spend long periods holding assets that lag or decay when inflation is quiet. Trend following offers a different kind of protection because it does not require knowing in advance which asset will respond first, which will respond later, or how long the regime will last.

The paper’s conclusion is consistent with the way we think about portfolio management at Fortuna. We do not believe the goal is to predict inflation, recession, interest rates, or commodity prices, but to build portfolios that can respond when the world changes.

Valuation helps us avoid leaning too heavily into assets priced for poor long-term returns. Trend helps us recognize when markets are moving in ways that deserve respect, even when the economic explanation is messy or delayed. Broad asset-class diversification gives the portfolio more than one way to survive.

Inflation is a stress test for investment philosophy.

Inflation exposes whether a portfolio is truly diversified or merely spread across assets that depend on the same favorable conditions. A stock-and-bonds portfolio can work beautifully when growth is stable, inflation is contained, and interest rates are falling. The historical record suggests that investors should not expect the same portfolio to defend purchasing power when inflation rules.

That does not mean investors should abandon stocks or bonds, but that inflation protection has to be designed deliberately.

When looking at a century of data, it's clear that every long-term portfolio can benefit from inflation hedges. The hard part is making the change before it's obviously needed, and sticking with it through the long stretches when anything but stocks feels like a waste of time. Fortunately, a broad trend-following approach can keep you allocated to stocks during bull markets, just as it can keep you in gold in a crisis. The best portfolios continually adapt to both good times and bad.

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