Chris’ note: It’s been a brutal year for us as investors. We’ve had to deal with sky-high inflation… rising interest rates… a looming recession… and a bear market. If you’re like most folks, you’re feeling the sting.
That’s why, over the holidays, I’m spotlighting some of our experts’ best insights from 2022. This week, we’ll look at how you can protect and even grow your wealth through the worst inflation in 40 years.
Today, we kick it off with colleague Teeka Tiwari. He’s a former Wall Street broker and hedge fund manager who heads up our flagship Palm Beach Letter advisory.
And earlier this year, he shared a new way to set up your portfolio to tackle inflation. And as you’ll see, it’s nothing like the traditional 60/40 portfolio that splits your wealth between stocks and bonds.
Even the roar of an 850-horsepower Ferrari engine couldn’t drown out this big idea.
In May, I was at the Miami Grand Prix …
Formula 1 (“F1”) races are some of the most prestigious events in the world. The inaugural race in Miami was no exception.
F1 racecars are custom-built and worth millions of dollars. Red Bull sponsored the car the winner of the Miami race, Max Verstappen, drove.
It cost more than $20 million.
But as exhilarating as the race was… the real excitement was getting to rub elbows with some of the richest people on the planet. I was eager to find out where the mega-rich were putting their money.
Teeka at the Miami Grand Prix in May
These events attract sports stars, entertainers, dignitaries, even royals.
At the Miami Grand Prix, I saw several celebrities including Tom Brady, Michael Jordan, and David Beckham.
I also recognized plenty of lesser-known mega-wealthy folks. During the race, I asked them what they were doing with their money amid this market turmoil.
What they said stunned me.
“I’m buying Ferraris.”
I spoke with some of the world’s biggest, most passionate car collectors. So it’s no surprise they’d love to own high-performance sports cars.
But that’s not all they’re buying.
They also said they’re putting their money into red-hot real estate markets like Los Angeles, New York City, and the Hamptons.
A few even mentioned buying condos in downtown Miami – where high-end units are going for $5–6 million.
Many said they’re also buying millions of dollars’ worth of luxury watches and blue-chip art.
That’s when, amid the engines’ roar, I realized: They’re not buying these things just as a hobby…
They’re buying them to protect their long-term wealth.
New Reality of Money
Wealthy folks have always bought collectibles as status symbols or passion investments.
But today, their high-end cars, luxury watches, and fine art double as assets with values that’ll increase exponentially over time – protecting their money.
Like you and me, today’s ultra-wealthy are worried about inflation. In fact, according to a report by global wealth consultant Knight Frank, it’s their top concern.
We’re in what I call a New Reality of Money. Obscene money-printing and out-of-control inflation have perverted the normal rules of money.
I own boats and cars I bought between three and five years ago. They’re now worth more than what I originally paid.
Friends, that’s not normal. It should never have been able to happen.
My biggest personal gain on an investment over the last 12 months hasn’t been in crypto. It’s been in luxury watches. I have watches with values that have soared as much as 800%.
Even with the global pullback in asset prices, many of these watches are off only 15% from their highs.
The Consumer Price Index (CPI) is a common measure of inflation. This chart shows how the CPI has risen since the start of the century:
The wealthy are watching their cash reserves melt like ice cubes in the Miami sun. They’re desperate to protect their buying power as inflation hits its highest since 1981. Since the early 1980s, inflation has eroded the buying power of $1 to about 36 cents.
So, the wealthy want some real wealth they can hold in their hands, put on their wrists, or admire in their 20-car garages.
Instead of sitting on cash or allocating the bulk of their assets to stocks and bonds… they’re buying assets that appreciate ahead of inflation.
In contrast, many everyday investors still follow the classic 60/40 model.
That’s referring to the traditional portfolio split of 60% stocks and 40% bonds. Many financial advisers and institutions still recommend this ratio.
But my research says this model won’t grow fast enough to keep up with the New Reality of money-printing and out-of-control inflation.
You may be thinking, “Hey Teeka, the Fed is raising interest rates. So, inflation should come under control.”
I know. But the Fed will likely stop raising rates sooner than the most investors expect.
Here’s why…
The yield on the two-year Treasury note has already risen above the yield on the 10-year note. That’s the bond market telling you it believes interest rates will fall in the future.
Lower rates mean more money-printing… and probably a lot more inflation.
Stocks will rally once the Fed stops raising rates. And that’s great news. But it’s not enough to combat the New Reality of Money.
Stocks Alone Won’t Protect You
The average investor significantly underperforms the stock market.
As you can see above, the average investor’s return over the last 20 years is just 3.6% annually. The S&P 500’s annual return was 9.5% over the same time.
And since the creation of that chart, inflation has shot up to an annual rate of 7.1% as of November. So, inflation is around 2x higher than Main Street’s average yearly return.
Bonds aren’t doing any better…
The yield on the 10-year Treasury is 3.7%. And at 7.1% inflation, you’re losing 3.4% per year in buying power with this bond.
And that gap is growing every year.
Hard Work Won’t Cut It Either
No matter how hard you work, how many extra shifts you pick up, or how many more work meetings you slog through, your standard of living will continue to decline.
Your wages, stocks, and bonds can’t keep up with inflation.
It’s not your fault.
Even if you scrap every luxury you allow yourself – a weekend getaway, an evening out with your spouse, something nice for the kids, an expensive cigar – it’s not enough to bridge the ever-inflating gap between the lifestyle you used to have and the life you’ll have in the coming years.
What will work?
Remember what the rich are doing.
Contemporary art has delivered average annualized returns of 14% over the past 26 years. Venture capital and bitcoin saw average annualized returns of 19% and 166%, respectively, over the past decade.
A recent Ernst & Young survey found that 81% of ultra-high-net-worth people now invest in these and other alternative assets.
Meanwhile, everyday investors allocate less than 5% to alternative investments. Is it any wonder the Main Street investor is getting left behind?
As more investors diversify into alternative assets, we’ll see even bigger returns from these nontraditional investments.
The good news is you don’t have to buy a Ferrari, a Picasso, or a multimillion-dollar condo in Miami to protect yourself against inflation.
There are strategies anyone can use to invest just like the ultra-wealthy. You just need a game plan.
Biggest Change Since 2016
Since I took over my flagship Palm Beach Letter advisory in 2016, our average annual gain is 144.4% – even with this current market pullback.
By comparison, the average annual gain of the S&P 500 over the same time is about 13%.
That’s a bit higher than the 20-year average annual return of the S&P 500 of about 9.5%. So even after a great bull market for stocks – we’ve done over 11x better.
But as times change, we need to change with them. And to help you navigate this New Reality of Money, I just made the biggest change in seven years to the asset allocation model we use at Palm Beach Research Group.
I now recommend allocating 50% of your portfolio to stocks… 20% to fixed income, or bonds… and 30% to alternative assets.
Don’t know how to start investing in alternatives?
My team and I have been tracking ways you can fractionally own alternative assets like classic cars and blue-chip art.
With fractional investment, the owner of an asset can list that asset on a platform and offer shares (or fractions of the asset’s value) to investors.
For example, you could list a $100,000 rare baseball card on certain platforms and offer investors fractions of it at $100. If the card’s value rises to $1 million, a $100 fraction would rise to $1,000.
This is now available for everything from supercars to luxury real estate.
One platform I recommend is Masterworks. It allows you to get fractional ownership in some of the world’s most desirable paintings for as little as $20.
It’s a great first move to add some inflation-beating alternatives to your portfolio.
Let the Game Come to You!
Teeka Tiwari
Editor, The Palm Beach Letter