Inflation Is Coming..

What does this mean?

It means if your money isn’t moving forward, it’s falling back.

That’s due to inflation, which is almost always with us. Inflation means that prices for things are rising, and so the same amount of money buys less. So, over time, inflation eats away at the value or worth of your money.

That’s especially bad for people holding cash — or funds in checking or savings accounts, which usually don’t offer much of a return.

The solution is investing for inflation — choosing investments that will give you a return greater than the current rate of inflation — or that at least, that keeps up with it.

Here’s everything you need to know about investing to beat inflation, and which investments make the best inflation hedge.

What is inflation?

Inflation refers to rising prices on goods and services across an economy over a period of time.

We measure inflation with the “inflation rate,” calculated as a percentage of change of a price index (a representative sampling of goods and services) from one year to the next. In the US, the most commonly used price index is the consumer price index (CPI), but sometimes economists will also use the producers price index (PPI).

Inflation below 2.3% is considered low. It’s considered mild between 2.3% and 3.3% and high between 3.3% and 4.9%. Inflation above 4.9% is considered to be very high.

Inflation isn’t all bad. Economists like to see a low, steady rise in prices, because it means a healthy economy: Companies are producing, consumers are buying, business and employment and wages are all up. Currently, the US Federal Reserve targets an average annual inflation rate of 2%.

How inflation reduces the buying power of your money

Low inflation may be good for the economy, but it’s bad for your wallet. “If annual inflation rates hit 5%, a dollar will only be worth $0.95 cents the following year,” says Mark Williams, master lecturer in finance at Boston University’s Questrom School of Business.

And it’s not just cash that loses value.

Williams notes that those with low-interest bank accounts effectively lose money during periods of inflation because the interest they pay is eaten up by the decline in value. Indeed, any investment that generates a fixed rate of return or interest will see diminished returns in real dollars during inflation.

So while inflation impacts all investors, it’s especially tough on income-oriented investors.

So what are your options?

Certain specific investments do well when inflation is climbing. Choosing among these assets should reflect your own goals, and also how severe the inflationary climate is.

Stocks

Rising prices can mean more profit for companies, which in turn boosts share prices. No guarantees, of course, but over the long term, the stock market has historically provided returns that beat inflation. Technology and other growth stocks, which outperform the overall market, make the most solid hedges against inflation. Consumer goods companies and others in the defensive sector, which produce basics people need, also do well. Of course the volatility in the overall markets can cause huge drawdowns especially for those looking for consistent cashflow.

Commodities

“Commodities tend to have outsized returns during times of high inflation,” says Adem Selita, CEO of the Debt Relief Company. Commodities are a type of real asset, commodities are things like crops, raw materials, or natural resources. Their prices go up those of other goods or services that use those goods.   However with the global movement towards renewal sources of energy traditional energy commodities, like oil and gas are quickly falling out of favor.

Real estate

Real estate is both a real asset and an appreciation-oriented one. Like commodities, land and property values tend to rise alongside inflation. Sophisticated investors have long leveraged commercial real estate as a hedge against economic uncertainty. By incorporating CRE in your portfolio, through strategic investments in recession-resistant markets and segments, investors can avoid the ups and downs of the broader market through reliable income and stable growth.
And passive investments offer participation without the need for getting your hands dirty.  Wouldn’t it be ideal to invest in a segment that thrives on uncertainty and volatility while still delivering consistent income and growth?

That segment exists in the affordable housing sector of multifamily where the sector saw rent growth and occupancy in 2020 – bucking the trend of the rest of the CRE asset class.

If you have any questions or want to speak with us about some of our investments, please feel free to reach out to me at travis@freemanequity.com or feel free to schedule a quick Zoom meeting here.