Inflation and Your Portfolio

There’s no such thing as a free lunch. That’s what you grew up hearing from your parents. The point was that someone somewhere paid for that free lunch. 

In the case of the government’s recent stimulus package launched in response to the COVID-19 devastation, that someone somewhere, who may end up paying for the stimulus checks, is our future selves who will see our portfolios eroded by inflation.

With COVID-19 bringing the economy to a grinding halt and with record unemployment, consumers have cut spending and increased savings. Businesses, however, have slashed prices as wages have come under pressure. 

Just as bad as runaway inflation, runaway deflation - where falling prices slash corporate bottom lines - can erode 401k and IRA retirement portfolios heavily invested in Wall Street.

In response to deflationary fears, the government passed the CARES Act to stimulate the economy including not only relief to households and individuals earning less than $75,000 in the form of $1,200 checks, but also loans, tax breaks, and grants for businesses hit by the emergency.  

Most experts agree that the short-term relief from the economic stimulus will result in higher inflation later. In other words, our future selves will be paying for the free lunch. 

This is because the three main factors driving inflation will all be in play as the country and world begin to normalize once the COVID-19 dust settles. 

Those three main drivers are:

• Demand.
• Supply Pricing.
• Currency Devaluation.

As people get back to work, consumers will get back to spending - driving demand and prices up. 

Another factor that will drive prices up will be a less global supply chain. As companies seek to rely less on China for its supply - given the disruption to the supply chain caused by COVID-19 - the cost of goods will go up as companies bring their supply chains closer to a home where labor prices can’t match cheap Chinese labor.

As for those stimulus checks? Those were made possible from printing money - government borrowing. 

So far, it’s estimated that the U.S. Treasury and the Federal Reserve have pumped more than $6 trillion into the economy - with potentially much more to come. All this will have the effect of chipping away the value of the dollar, which is already happening.  

Who will pay for all these stimulus checks? Our future selves. 

How will we pay? It’s simple math actually. 

In uncomplicated terms, inflation is the increase in prices over a period of time. Some inflation is good - showing that the economy is growing. Too much inflation is bad as it will cost more to buy the same amount of something in the future than it does today. High inflation means a gallon of milk that once cost $2 may now cost $3.  

Everybody expects the price of goods to grow over time. Some inflation is expected. It’s a fact of life. A 24-pack of Coke will cost more in 10 years. 

Some inflation drives the economy as many consumers choose to buy now instead of waiting until later when prices are higher. This increases demand in the short term and keeps the fires burning in factories as stores sell goods people want now. They are more likely to hire new workers to meet demand. This boosts economic growth. 

Some inflation is good. Too much inflation is bad. Too much inflation is bad because the danger is hitting the tipping point and entering hyperinflation territory. 

Runaway prices mean consumers can’t even buy the essentials - like in Venezuela where people resorted to breaking into zoos to slaughter animals for food because they couldn’t afford even a loaf of bread.

Inflation will be devastating to pensions and other fixed-income retirement plans like annuities. Even social security with its cost of living adjustments won’t be able to keep up with runaway inflation. Those relying on pensions, interest payments, and annuities will feel the devastating effects disproportionately. 

A pensioner receiving $100 a month will see that $100 goes less and less and less further as inflation boosts prices.  

Even during normal times, where inflation hovers in the 2.5% range, it can still be a significant wealth eroder. Imagine putting $1 million under your mattress. That $1 million will be worth 2.5% less each year you leave it under there. In ten years, it will only be worth $776,329.62.  

The predicted rising prices from demand, rising supply costs and devaluation of the dollar will all combine in a perfect storm to erode future buying power and make it harder and harder for potential retirees to retire on schedule. 

If you’re a retiree waiting for the retirement bus to arrive, inflation just pushes that bus further and further away.

Wouldn’t it be nice to have some invisible shield against inflation to protect your portfolio against its erosive effects? 

Well, savvy investors have long been relying on one particular shield to protect their portfolios from inflation. That shield is cash-flowing real assets.  

How do cash-flowing real assets shield your portfolio from inflation?

There are actually some investments that do well in the face of inflation and there are those that predictably do worse than putting your money under the mattress. 

A recent Wall Street Journal article studied the correlation of the returns of certain assets in relation to inflation over the past 50 years. According to the article, the more closely an asset’s returns track the course of inflation, the better the asset serves as a hedge.  

Tangible assets like commercial real estate as specifically pointed out in the article, correlated best with inflation. In other words, returns on hard assets like real estate rise as inflation rises. On the other end of the spectrum were stocks and bonds, which fared the worst relative to inflation.

So why is commercial real estate an ideal hedge against inflation? 

Because as a hard asset that is supply constrained (in other words, they ain’t making any more land), rising prices increase the resale value of the commercial real estate over time. 

The added bonus of commercial real estate is that just as the value of the property rises with inflation, the amount tenants pay in rent can also increase over time.

Savvy Investors leave nothing to chance. They take all the unknown variables out of the equation to neutralize the negative effects on their wealth and portfolios. 

Things like stock market volatility and inflation mean nothing to them because they insulate their portfolios with cash flowing hard assets that actually thrive in downturns and in periods of high inflation.

The government has shown that it’s willing to dump as much money into the economy to stem the effects of COVID-19. With no end in sight to fiscal stimulus, high inflation seems inevitable. 

Don't Be Slaves to Market Forces Out of Your Control

Insulate Yourselves from Inflation and Market Volatility

If the past 50 years have taught us anything it’s that hard assets like commercial real estate fare far better in the face of inflation than stocks and bonds, which have been shown to actually move in the opposite direction.  

Take control and insulate your portfolio from the eroding effects of inflation.