With inflation on the horizon, stocks are a way better hedge than cash or bonds.
And that said, if you go hunting for value and well priced stocks, you will be way better off.
I've found a much better portfolio allocation that gives similar long term returns to being invested in equities, but without the wild swings:
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...
That's a huge presumption considering we've just done the same things that historically create deflation and resulting depressions.
Trillions in questionable debt is still outstanding, and the Fed and Govt's intervention is far from clearly solving that.
It's very possible we could end up like Japan in the 90s - deflating - or worse since they had household savings then and we don't.
It's also possible we could get some unholy combination of currency inflation and debt deflation, which I have no idea what that looks like, but I imagine it ain't pretty. Only thing I'm certain of is that stocks outperforming bonds and cash over the next 20 years is not a certainty. The past 50 years is not enough data to know that for sure.
Inflation is when the money supply grows, deflation when it shrinks. The person your responding to is correct to point out out money supply is being inflated, and inflation has been increasing in rate.
This may well lead to economic troubles which will cause some businesses to lower prices out of desperation.
You can call that price deflation if you want.
But don't forget the qualifier and then claim the other guy is wrong when you equate one economic phenomena with another by misunderstanding the terms.
I know you probably haven't heard about this, most mainstream economics talk is acutallu political talk that tries to pretend inflation is measured in price (an effect of, not the cause of inflate.)
For instance it is correct to say inflation was one of the causes of the great depression which resulted in price deflation. Also a major effect there was the real deflation of the criminalization of gold that literally made the us currency illegal eliminating much if the money supply -- while inflating paper money.
Steve Keen has an interesting article on endogenous money at www.debtdeflation.com. Bernanke has increased M0 drastically in an effort to stave off deflation (I guess asset price deflation is the key in this case), but Keen believes it won't work because our system is not a true fiat money system but a credit money system with a fiat money subsystem tacked on, and in the current circumstances banks/companies are not going to expand credit no matter what happens to M0. That is, banks lend money first, then go hunting for reserve supply (M0) to back it up, opposite to the text book theory for how the money supply works.
Price deflation is just a symptom of underlying problem/s, not the actual problems. It's the canary in the coal mine, not the gas leak that's about to blow it up. Prices can deflate or inflate for a number of reasons, from supply:demand imbalances (typical business cycle), change in money supply (which changes demand for goods and services relative to supply), or some other structural change in aggregate demand. Price inflation/deflation is only interesting to me in that regard as a vaguely-specified warning light urging further investigation/troubleshooting, but not as the underlying problem.
I agree with Steve Keen's hypothesis that jwhite linked here, Bernanke can print all he wants, and drop interest rates all he wants, but there's a realistic chance that it won't have the effect he intends. Banks won't start issuing new credit until they are confident the economy can support both the old credit (at an acceptable, pre-crisis default rate) and the new credit.
With the government and Fed propping up a significant percentage of our GDP right now, the odds of banks regaining that confidence aren't great.
For the last 10 years, the S&P 500 is down 2.5% on an annual basis. You could have done better w/ govt bonds & CD ladders.
I think the 20 year plan assumes a greater will power than the greater investing community possesses.
Typical investment advisors tell you to buy stocks and then point out that over the last century stocks have done very well. The problem is that none of us are investing on 100 year long timelines. We are usually investing on 30-40 year timelines and hoping to have a good amount saved when we retire. If you happen to need to retire and start pulling money out in a bad year like 2008, you're screwed.
Check out this allocation for returns as good as stocks without the huge downside risk: http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-...