Inflation has been one of the hottest topics in 2021, both because it’s around the highest we’ve seen in 30 years and because it affects us all personally. We’re seeing higher inflation due to an enormous amount of fiscal stimulus, coupled with a high demand for goods and a lower supply of the same goods. This all began in March of 2020 with the start of the pandemic and escalated this year with continued federal stimulus and strains on the supply chain. The Federal Open Market Committee (FOMC or The Fed for short) believes the high level of inflation is only transitory while other investment professionals believe it may linger for some time.
Since inflation affects us all we need to understand how to protect ourselves from the negative impact of paying higher prices for the goods and services we depend on. Since we can’t reduce prices, it’s important to optimize our cash to keep up with, and beat inflation.
First, let’s look at two pitfalls to avoid during times of high inflation: holding on to excess cash and owning bonds. If you have extra cash parked in a low yielding savings account, you are losing money (at least the buying power of money). For example, let’s say inflation is 5% in a given year and you have $10,000 in a savings account. After inflation that $10,000 now only has the buying power of $9,500. Even moderate inflation has a big impact on uninvested money over the long-term. Fixed bonds are another potential loser when inflation is rising because it’s not a dynamic investment. If a bond yields 3% and inflation is 5% then the bond yields a real return of -2%. This loss is not as bad as a savings account but still not ideal.
Now let’s look at two of the best ways to beat inflation: investing excess cash in the stock market and in real estate. When you invest in a stock you are investing in a dynamic company which can raise the price of its goods or services, while profits are not eaten away by inflation. The stock market still has its usual ups and downs but over the long-term it usually protects an investor from inflation. When you buy real estate, you are owning a good, a house that others want and are willing to pay more for as inflation increases the price. Real estate prices may increase faster or slower than other goods or services, but it will generally be inflation protected.
Want to double check that your finances are optimized for inflation? Email me: Adam (at) BarnaiAssetManagement.com
Photograph by: Sean Robertson
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