We no longer need to wait for inflation to arrive, it’s already here.
The Labor Department reported earlier this month that its consumer price index (CPI) – which measures what consumers pay for everyday items including groceries, clothing, recreational activities, and vehicles – jumped 2.6% in the year ended March, the biggest 12-month increase since August 2018, Nearly half of that jump was from a 9.1% jump in gasoline prices.
Should we be concerned? Of course, we should be. Diapers, donuts, and toilet paper are going to be more expensive.
Inflation means less buying power. It means our salaries won’t go as far. It also means that if your investment portfolios aren’t allocated to the right assets, you can expect an erosion of their value. If your investments don’t keep up with inflation, your portfolio will be bleeding value.
Take, for example, the stuffing money under the mattress strategy:
If you put $1,000 under the mattress today and the average inflation rate over the next five years is expected to be 3% (the 20-year average is 2.4%), your $1,000 will lose 3% of value every year.
Current CD, money market, and savings account rates all fall substantially short of inflation, and if inflation accelerates, this gap will only get wider with your portfolio losing value in lockstep.
How do you protect your portfolio from inflation?
By Allocating To Assets That Correlate With Inflation
If inflation reflects rising prices, doesn’t it make sense to invest in commodities with prices that rise accordingly?
The ideal asset is one that cash flows as well as grows. Thus, not only will the prices of these products or services that generate income rise with inflation, but the underlying asset will appreciate it as well.
Why is real estate an ideal asset in an inflationary environment?
Besides the price of gas, the government listed medical care, housing, and shelter as other driving factors for accelerating inflation. Real estate, especially real estate that combines the functions of housing and medical care, such as assisted living or senior housing, is ideal for shielding a portfolio from inflation. That’s because the rents collected from real estate are expected to rise along with inflation. Moreover, the underlying asset will also appreciate with inflation.
With income and growth in lockstep with inflation, a portfolio generously allocated to cash-flowing real estate will be best prepared to absorb the impact of the erosional effects of inflation.
In contrast, money under the mattress, savings, and unappreciating tangible assets are the death knell of portfolios in the face of accelerating appreciation.
Don’t Fear Inflation – Go Along With It.
Those who fear inflation and hide their assets in the face of it are doing their portfolios no favors. Conversely, those who acknowledge inflation and reallocate their portfolios to deal with it will be the ones who survive it.
Look at your portfolio and ask yourself if it has what it takes to keep up with inflation:
- Do your assets cash flow?
- Do they have underlying value? In other words, are they tangible? If not, maybe it’s time to reassess and reallocate.
People who live in Tornado Alley learn to live with the impending dangers because they prepare for them and have a plan.
If you prepare for inflation – even hyperinflation – your portfolio will survive it. Otherwise, expect financial devastation.