“Inflation destroys savings, impedes planning and discourages investment. That means less productivity and a lower standard of living.” Kevin Brady.
Inflation – The new addition to the list of Risks. As is we didn’t have enough. The sleeping giant of inflation has awakened. The Federal government poured TRILLIONS of dollars into the economy in a very short time. Now that it’s awake, inflation is likely not going anywhere but up.
You could call it the Dream Killer, the Retirement Wrecker, the Confidence Robber, the Hope Thief, the Tuna Fish Diet Enabler, or perhaps the Golden Girl Roommate Producer.
Inflation increases prices over time and therefore decreases the spending power of our dollar. That is, your dollar and mine will not be able to by as much in the future as it can today.
In the meantime, as prices go up, the price of currently held stocks may also go up depending on what’s in your portfolio. And, the price of new stock purchases will cost more meaning fewer shares for the same $ invested.
“Charlie Munger, Vice Chairman of Berkshire Hathaway, issued a dire warning on inflation calling surging prices the biggest threat second only to nuclear war.” (CNBC)
Inflation is serious business. Today it is at 7.9%! – a 40 year high. A year ago it was 1.7%. (According to Bureau of Labor Statistics, March 10, 2022)
We could spend time discussing the causes of our current inflation and some potential solutions. Unfortunately, that will not make any difference to the people who can actually do something about it.
So what do WE do?
What we have always done. We assess the situation and begin to take action. We realize that, for right now, the WIND has changed direction and we need to ADJUST our sails.
We work to maintain our current situation and potentially improve our circumstances.
Sounds nice, but what can we as individuals really do?
When prices are going up all around you, what you don’t want to do is go to cash and hoard it, because your cash will continue to lose its value. What you want to do is INVEST.
Great suggestion, but what do I invest in?
That’s a good question, so let’s think about it. If the price of “X” is going up, even exceeding inflation, then you want to own some “X”.
Why? Since the price is rising, it may allow you stay even with or exceed inflation.
What if “X” is a commodity such as wheat or corn and you don’t invest in the Commodities Markets.
You can own stock in companies that deal in those commodities such as, Archer Daniels Midland (ADM), Cargill, Del Monte, etc.
You get the idea. You can do this across many commodities, minerals, precious metals, etc. Take a Look at the Sectors that contain those industries. (Examples below)
Generally speaking, during inflationary periods the areas that typically benefit are:
(1) Energy Sector, people need gas, electricity, heat, etc. regardless of the price.
(2) Commodities, people need food for example, and with our supply chain problems prices will rise, especially when you consider that it takes energy to plant, harvest and deliver food to the consumer. (Consumer Staples Sector)
(3) Financials Sector, during inflationary periods more money passes through the financial sector and they always manage to take their fees off of the top. So, they typically do well.
Depending on the specific causes of the inflation, there may be other Sectors that benefit, such as Real Estate Sector and REITs.
I hear you, but jumping in now might be risky.
You’re right, it is somewhat risky. But as the saying goes, “when you’re stuck between a rock and a hard place you’ve got to make a choice”.
While doing nothing is still a choice, it’s not a great one because we all know the outcome. Cash assets will decline in value.
At the same time, you can’t afford to lose your retirement nest egg. So, you are faced with a dilemma. There is risk on both sides.
The unknown is: how much will your assets decline in the case of doing nothing? And how can you provide some protection for your retirement nest egg?
Did you know?
1. Inflation today is at 7.5%. The highest in 40 years. Mortgage interest rates are climbing to 4+ %. That is considered bad. And it is! But it can get worse, a lot worse.
2. In the early 1980’s inflation pushed the mortgage interest rate to double digits.
3. “Interest rates reached their highest point in modern history in 1981 when the annual average was 16.63%, (!!) according to the Freddie Mac data. Fixed rates declined from there, but they finished the decade around 10%. “(Source: Rocket Mortgage)
4. Look at those numbers again, 1981 at 16+%, 1989 at 10%…over 9 years!
5. Bank loans rates were even higher. I know because the variable rate on my business loan reached that level! Inflation can kill companies and the jobs they provide.
It happened before and it can happen again!! We have been so fortunate for so many years.
Is it any wonder that we have a considerable focus on Risk Management?? We have learned some painful lessons over the years.
We are Not risk averse. We continue to invest. But we are thoughtful and measured in making those decisions. And we always consider downside risk.
Don’t want to be in the Market right now?
An option to consider, that may be better than keeping your invest-able cash in a bank account, is Treasury Inflation-Protected Securities, or TIPS. It is set up to provide protection against inflation.
“The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.” (Source: TreasuryDirect.gov)
If you need to keep growing profits to build that retirement nest egg, at some point you will need to be back in the market.
There is an option you might want to consider that can help you manage that investment risk, which is even more important in times of inflation. Trend Following.
Following the practices below and applying them to the Sectors that are benefiting from the inflationary pressures allows for more diversification.
This could help not only to weather this inflationary storm, but allow you to come out of it ahead!!
*The Trend Following investor only invests in stocks that are trending, that is, stocks whose price has hit a new high over a specific time period.
*They take a prudent position in the stock based on their individual risk tolerance.
*They always use Trailing Stop Loss Orders to limit potential downside loss and lock in gains.
Remember — We have been in tough spots before. We can weather this storm, too. Stay Calm and Carry On!
And – Always Ride Your Winners; Cut Your Losses!
Now might be a good time to try our 4 Week Free Trial. That’s right – not 1 week or 2, or even 3 weeks, but Four Weeks! Enough time to delve into it and determine if it is for you. Sign up here. We do not ask for your credit card information.