If you are like me, for years, even before the economic seizure we experienced at the end of 2008, you were probably wondering when the low interest rates and all of the “easy money” policies were going to result in inflation. Then, after the 2008 economic seizure, we witnessed the extreme become even more extreme. Money printing significantly increased, the bank lending rates dropped to zero, and again, if you are like me, you probably asked, is this not the exact thing that creates inflation?
Yet, despite all of the blatant catalysts, the inflation rate has been anything but alarming… but wait. Are we not hearing that our biggest bond buyer, China, is wary of our over-use of debt? Are we not just a couple of interest rate upticks away from concluding that, “the inflationary spiral we have been hearing about has begun?” Will there be a day of reckoning for devaluing our currency? Will runaway inflation become our nation’s biggest challenge?
If runaway inflation occurs, how can we best protect ourselves against it? Let’s face it, we do not know for sure that it is coming, but it sure would not be a surprise. Here are a few ideas:
Things to Consider:
Real Assets – Think “valuable” and “finite quantity.”
Real Estate – for instance, there is a finite amount of coastal real estate…the ocean makes sure that this remains a very “finite quantity.”
Precious Metals and Raw Materials – for instance, electric car batteries need silver and palladium, but these metals can’t be mass produced. They are expensive and difficult to find in nature. The fact is, most natural resources and life’s basic necessities are in short supply, while demand for them is soaring worldwide, especially in Asia.
TIPS (Treasury Inflation Protected Securities) – These bond yields are tied to the Consumer Price Index (CPI) and will increase or decrease as the CPI changes. In general, if the things cost more, these pay more and vice versa.
Stocks and Indexed Annuities – While inflation may cause stocks to suffer in the short term if things like cost of goods sold and borrowing costs increase for businesses, over the long term, stocks tend to keep your money growing ahead of inflation. Stocks for the Long Run author Jeremy Siegel points out that stock returns historically have been immune to the inflation rate over long stretches of time. Although rising prices could crimp profits in the short term, Siegel argues that companies – eventually – can pass on those costs to consumers, making inflation a wash for stock market returns. Please note that this is a generalization. There is no way to guarantee or predict the volatility and performance of any specific security.
What May Not Work:
Cash or Minimal Interest Savings Accounts – Storing money in savings accounts or, even worse, cash, is a losing proposition during high inflationary times. Just think about how much cheaper things like bread, stamps, and medical insurance were 10 to 15 years ago. If your money was under the mattress during that time, it definitely would not buy what it used to buy. On the other hand, if it were invested in appreciating assets, and it averaged an annual rate of 7%, it would have, approximately, doubled over a ten-year period (not including taxes or fees).
Long-Term Bonds – Inflation has a lot to do with bond rates and since rates are relatively low, we run the risk that rates will rise. That is bad for the current value of long-term bonds. You can think of it this way, if new bonds are being issued that pay higher rates than the ones you own, no one would want to buy yours except at a discounted price.
Finally, inflation-proofing your portfolio comes down to being invested in a diversified mix of assets that have a high probability of either keeping pace, or appreciating at a faster rate, than inflation. While cash reserves are vital for short-term financial security, the threat of inflation gives a good reason to keep long-term money invested in assets that have the potential to appreciate.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The market for all securities is subject to risk and loss of principal is possible.
The Financial Consultants of Upton, Draughon & Bollinger are registered representatives with, and Securities offered through LPL Financial, Member FINRA/SIPC 207 Ansley Blvd., Suite A, Alexandria, LA 71303, (318) 442-4944.