Yesterday, news broke that inflation was up 9.1% over the past 12 months in the U.S.
It’s the steepest rise in living costs since November 1981.
President Biden… Treasury Secretary Janet Yellen… and Fed chief Jerome Powell have claimed that inflation is “transient.” But this news makes those claims laughable.
More important, it’s a disaster for your savings.
At this rate, dollars you stuff under your mattress will lose half their buying power in just under eight years.
It’s also a headwind for stocks and bonds. Since the start of the year, they’re both down more than 10%.
As colleague and former hedge fund manager Teeka Tiwari has been warning his readers…
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.
So it’s critical you don’t slavishly follow the mainstream 60/40 portfolio split between stocks and bonds.
Instead, Teeka recommends taking your cue from the ultra-wealthy.
That means shifting some of your capital into nontraditional assets that have track records of growing wealth – even as inflation rages.
We looked at it in detail in yesterday’s dispatch. In short, bond prices fall as inflation rises.
Stocks may not be enough to keep you ahead of inflation either…
That’s the warning Teeka had for Palm Beach Letter readers in this month’s issue.
If you’re a paid-up subscriber, you can catch up in full here. And if you’re not yet a Teeka reader, don’t worry.
It’s all in this next chart…
You’re looking at 20-year returns for different investments such as the S&P 500, gold, and bonds (blue bars) alongside the returns of the average self-directed investor (red bar).
As you can see, investing in the S&P 500 would have earned you an average annualized 9.5% a year. That’s enough to keep up with the current inflation rate of 9.1%.
But the average investor earned a measly average annualized return of 3.6%.
That’s due to common mistakes investors make, like trying to time the market by jumping in and out of stocks.
That’s because it weighs on profits.
Companies’ costs go up. That squeezes margins. Inflation also erodes the value of the dollars companies earn.
So when inflation is rampant, investors revalue their stocks lower.
You can see what I mean in another chart Teeka shared with our Palm Beach Letter folks.
It shows the inflation rate (orange line) plotted against the price-to-earnings (P/E) ratio for the S&P 500 (blue line). The P/E ratio measures how much investors are willing to pay for each dollar of earnings.
You can see that as inflation rises, the P/E ratio falls. This pushes down stock prices.
So if you’re in only stocks and bonds right now in your portfolio – as the traditional 60/40 model dictates – you’re in trouble.
There’s nothing you can do to stop government money-printing… fix strained supply chains… or end Russia’s war against Ukraine.
But you can act to protect yourself against the inflation they’re causing.
Teeka says your portfolio should reflect the New Reality of Money we’re facing.
This is the plan Teeka unveiled last week in The Palm Beach Letter:
Here’s Teeka on how it fits together…
The first category is stocks (aka equities). This remains the largest chunk of our portfolio, at 50%. Owning the right stocks for the long run offers great growth over time relative to most asset classes. You should focus on blue-chip stocks with above-average dividend yields and growth stocks with high upside potential.
Second, fixed income is 20% of the portfolio. Bonds are coming off their worst start to a year since the Civil War. In a market where a 2% to 3% drop in six months is big news, the U.S. bond market is down more than 10% so far in 2022. So in addition to special high-yield bonds, look for investments with inflation-beating yields outside of bonds. These include real estate.
The final 30% is in alternatives. This includes asymmetric investments such as cryptos and private shares. These have huge upside potential. So you don’t have to invest large stakes to have the chance at life-changing gains. Alternatives also include financial safe havens, such as collectibles, precious metals, and other “hard assets” that can outpace inflation.
An Ernst & Young study last year revealed that 8 in 10 ultra-high-net-worth individuals invest in alternatives. And Teeka has noticed that includes many of the high-net-worth individuals in his own network.
For instance, he was at the Miami Grand Prix in May. There, he asked some wealthy contacts what they were investing in amid the current market turmoil.
The answer wasn’t stocks and bonds. It was collectible Ferraris… luxury watches… blue-chip art… and red-hot real estate markets in Los Angeles, New York City, and the Hamptons.
These alternative assets are in high demand. At the same time, they’re in scarce supply. That makes them great inflation beaters.
Contemporary art, for instance, has delivered average annual returns of more than 14% over the past 26 years. Even with today’s inflation rate, you’d come out ahead.
They’re not for just the ultra-wealthy.
Teeka and his team have been tracking ways you can fractionally own 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 Teeka recommends 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.
And as we continue facing this New Reality of Money, I’ll have more alternative investment recommendations for you in future dispatches. Stay tuned…
Until tomorrow,
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Chris Lowe
July 14, 2022