EP. 33: Protect Yourself From Inflation

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Welcome back Money Matters where I help guide you in becoming a better and more confident investor. In this episode I want to talk about inflation, is this a threat, and how you can help position yourself from its insidious nature.

Depending on your age, you may have a different view of inflation. Older investors recall from 1970 – 1980 when inflation averaged an annualized approximately 7.8% with being as high as roughly 13% in 1980. Thankfully these days inflation is harder to come by, but even so this is something every investor should be cognizant of when building their portfolio.

If you’re on the younger side then inflation might be more difficult to grasp because over the past 15 years annual inflation has averaged approximately just under 2%, which is well below the 3.4% approximate average annual increase put in motion since 1950. You’ll find it’s lower because of the aging population, as the older generations don’t seem to be spending as much money adding to our nation's GDP. Likewise, you see labor cost steadily decreasing as technology continues to make businesses more productive and trim the fat on repetitive, mundane jobs. And with the huge e-commerce giants, there’s a healthy pressure to compete in keeping prices lower.

Resulting from COVID-19 came record unemployment which leads to a huge decrease in consumer spending and ultimately a recession. Some are speculating higher-inflation will follow, but from what we are seeing based from the Consumer Price Index just rising slightly over .6% over last year, which is the gov’t main metric for inflation that may not be the case, especially if the supply of good continues to keep up with the demand, otherwise econ 101 – you’ll see prices start to rise.

The important thing to know here is investing in the stock market, over time can likely be a great hedge to inflation. Just because inflation doesn’t seem like a huge worry at the present moment take Kristina Hooper – who is the Invesco Chief Global Market Strategist – word for it when she says “Historically, inflation has reared its ugly head at surprising times. Inflation-hedging strategies should be a long-term component of your investment strategy, not something you do only when you think inflation is going to rise”.

The big red flag if you will and sing of accelerating inflation in the coming years comes from the unprecedented amount of government stimulus money that has been flowing into the economy. And while we didn’t see this resulting from similar government intervention from the Great Recession fall-out in 2008, we’ll have to watch the Consumer Price Index closely to see how the current spending will play out. Globalization of trade, especially with China has seemed to be a head-wind for inflation these past few decades and with how that’s been increasingly more sensitive under the current administration, disrupting global supply chains and domesticating more U.S. Good with tariff incentive could likely add to inflation down the line as well.

So how can you hedge against inflation when dealing with your investment strategy? The stock market over time, being invested in equities has seemed to keep pace with inflation, also adding to the possibility of outpacing inflation keeping you ahead of the rising cost of living, and some. I always recommend going with quality companies that have the competitive advantage of being able to raise prices without losing customers. But for the more conservative investor, you could explore the opportunity to research buying Treasury Inflation-Protected Securities or (TIPS). They adjust their principal amount based on the Consumer Price Index I spoke earlier. You can either purchase these straight from the US gov’t or find a fund that you agree with. Some might also consider floating-rate debt. With inflation and rising interest typically going hand-in-hand this can prove to be a good hedging strategy with rising inflation in the short-term.

Lastly, don’t ignore international markets. While the US markets have been the clear winner amongst the risk-reward conversation this past decade, rising inflation in the U.S. is typically paired with a weaker dollar, which leads to foreign currency profits getting converted into more U.S. greenbacks, which can help hedge against inflation when dealing with your financial plan in a whole.

I always like to have a small portion of my financial plan include Real Estate Investment Trust or REITs, knowing that it’s not only a portfolio-asset diversifier but typically keeps with inflation as landlords typically increase rent to buffer their costs in inflationary times. 

So ideas to consider if you’re worried about inflation and want to take some proactive steps with your financial strategy with what’s to come. Of course, since, I’ve joined my father’s team to create Colby Financial Guidance in 2017 we’ve been helping guide those throughout the Rochester community to make better decisions with their financial matters. If what I say in these videos makes as much sense to you as it does to our team then consider find time to have a conversation where I’d be happy to listen and see where my team and I can be of service to you.

Thank you for watching and as always thank you for giving your finances the attention that they deserve!