Retirement Investors Expect the Unexpected with Real Assets

PGIM DC Solutions’ Jeremy Stempien shares benefits of including real assets in portfolios during periods of elevated, unexpected inflation.

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Asset classes have historically addressed inflation risk differently. Looking at performance of asset classes in different inflationary environments demonstrates that real assets, which include commodities, real estate, and global infrastructure, have been especially effective diversifiers that can be effective at combatting inflation concerns for investors planning for and in retirement. 

The chart below provides information on expected consumer inflation as well as actual future inflation. The gap (or estimation error) between two values is referred to as unexpected inflation. Notice that while inflation expectations are relatively accurate, there are periods when inflation is notably higher or lower than expectations. Real assets are commonly cited as important diversifiers against inflation risk, but they don’t always appear to be that beneficial when the risk and returns of these assets are viewed in isolation. 

EXPECTED, UNEXPECTED, AND ACTUAL INFLATION 

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Source: Morningstar Direct, University of Michigan, and PGIM DC Solutions calculations. Data from 3Q 1981 to 1Q 2025.

However, when thinking about the potential benefits of investments in a diversified portfolio, it’s important to view the impact of an allocation holistically, not in isolation. Next, let’s examine how the asset class returns are correlated to historical expected and unexpected inflation levels. 

ASSET CLASS RETURN CORRELATIONS TO EXPECTED AND UNEXPECTED INFLATION LEVELS

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Source: Morningstar Direct, University of Michigan, and PGIM DC Solutions calculations. Data from 3Q 1981 to 1Q 2025.

We can see that more traditional investments, such as cash and bonds, tend to be positively correlated with expected inflation. This means as expectations around inflation increase, future realized returns for these asset classes have increased as well (consistent with most building blocks models). By contrast, real assets, in particular commodities, have historically had stronger performance during periods of higher unexpected inflation.

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Including real assets in a portfolio can be especially valuable for investors concerned with inflation risk, as real assets tend to perform better during periods of higher inflation when other, more traditional assets, have not, thereby improving portfolio diversification.

Jeremy Stempien, Portfolio Manager, PGIM DC Solutions

<p>Including real assets in a portfolio can be especially valuable for investors concerned with inflation risk, as real assets tend to perform better during periods of higher inflation when other, more traditional assets, have not, thereby improving portfolio diversification.</p>
Topics
  • Retirement
  • Investment Strategies

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