It’s how central bankers and lawmakers have been describing the current bout of inflation.
They mean it’s not the stubborn, long-lasting kind of inflation that can happen if you overstimulate the economy by printing too many dollars.
Instead, it’s the temporary kind supply-chain traffic jams can cause.
There’s just one problem…
Last month, the government’s main inflation gauge, the Consumer Price Index (CPI), rose 0.4%.
This brings the CPI’s increase over the past 12 months to 5.4% – the steepest year-over-year rise since January 1991.
Things have gotten so bad, some central bankers have broken ranks with the “it’s transitory” brigade.
Last week, the president of the Atlanta Fed, Raphael Bostic, said inflation could last into next year… and even beyond. And he said he and his staff were ditching the word “transitory” as a result.
But for us as investors, it doesn’t matter what’s causing prices to go up. What matters is inflation is here. And it doesn’t look like it’s going away anytime soon.
So today, I (Chris Lowe) will shine the spotlight on some simple moves you can make right now to grow your wealth as inflation runs high.
As you’ll see, as long as you don’t have a lot of your savings in cash in the bank… or stuffed under the mattress… you’ll do just fine.
There’s even a good chance inflation is working in your favor financially.
But first, it’s important you understand the threat to your wealth if too much of your portfolio is in cash.
With annual inflation running at 5.4%, every $100 you put away for a rainy day is worth $94.60 after 12 months.
That may not sound like a big drop. But give it enough time, and it will cause a ruinous loss.
The chart below shows how long it takes different rates of inflation to cut your money in half.
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As you can see, at an annual rate of 5%, it takes just 14 years for inflation to halve the buying power of your cash.
And that’s at a rate below what we’re experiencing right now.
Move your wealth out of cash and into stocks and hard assets.
As longtime readers will recall, hard assets are difficult to produce more of relative to their existing supplies. Think commodities such as oil, copper, gold, and silver… as well as real estate.
A recent study by investment firm Dimensional Fund Advisors showed this recipe works great.
It looked at the average annual returns of stocks and hard assets in periods of high inflation between 1991 and 2020.
In particular, it looked at their “real” returns – their returns above the rate of inflation.
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As you can see, going back to 1991, the U.S. stock market has delivered an average annual real return of 8.3%.
Hard assets did even better.
Take the Bloomberg Commodity Total Return Index, which tracks the prices for a basket of commonly traded commodities. It rose an average of 9.6% in real terms each year.
Or take the Dow Jones U.S. Select REIT Index. It averaged a real return of 12.7% a year.
REIT stands for real estate investment trust. REITs allow you to invest in income-producing real estate through your regular brokerage account.
Preferably with a mortgage.
Let me explain…
As I mentioned, real estate is a hard asset. So it tends to rise in price as inflation goes up.
Figures from Yale University economist Robert Shiller show that U.S. house prices have gone up an average of 1% in real terms each year going back to 1990.
That’s not as much as stocks… or commodities… or REITs. But it’s still a positive real return.
Meantime, inflation lightens the load of your mortgage repayments.
The average 30-year fixed mortgage in the U.S. right now is 3%.
So if you borrow $300,000 to buy a house, over those 30 years you’ll shell out $160,000 in interest payments alone.
But if the rate of inflation runs at an average of 2% a year over that time, your borrowing costs in real terms are just 1% a year.
That means the real, inflation-adjusted value of your interest payments will be only about $48,000.
The more inflation there is, the less you have to pay back in real terms.
Whether it’s due to supply-chain issues… or it’s a monetary phenomenon… it doesn’t matter. History shows that the wealth-stealing power of inflation is easy to sidestep.
Just follow the recipe I’ve shown you today. And choose stocks and hard assets over cash.
Over the past 40 years, they’ve been a winning combination in times of high inflation.
Also consider picking up exposure to commodities through the Invesco DB Commodity Index Tracking Fund (DBC).
This ETF (exchange-traded fund) is one of the most popular options for investors looking for broad-based commodities exposure.
Meantime, you can get easy exposure to REITs through the SPDR Dow Jones REIT ETF (RWR).
Later this week… I’ll show you another inflation-beating asset to add to your portfolio.
It’s the undisputed king of hard assets. So it has even more inflation-fighting potential than stocks, commodities, and real estate.
It also has even more upside potential.
Regards,
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Chris Lowe
October 18, 2021
Bray, Ireland