Inflation is all over the news: it’s a scary subject encouraging you to read more headlines. But how should you actually prepare your investment portfolio for potential inflation? As always: it comes down to planning.
If you have a well-diversified portfolio of stocks and bonds then there’s good news: you can do nothing. Be ready to make adjustments as those investments go up or down, as you typically rebalance.
There are two potential action items below, but first let’s consider:
- Gold: It’s not a given that gold does well in inflationary environments. I don’t typically recommend gold because its long-term returns are fairly average and well below stock returns.
- Crypto: Is this the new “store of value” and replacing gold? Not with all the current volatility.
- Commodities: They typically will rise ahead of inflation, and we’ve seen that over the last 12 months. Will they continue to climb? Unknown.
- Real Estate: Your home is a great investment during inflation periods because you have a fixed-rate mortgage where dollars are worth less in the future. REITs and rental properties might increase in value or not, depending on increasing rents which are not always guaranteed with inflation
Two areas to consider making changes:
- Refinance your Mortgage: If you can borrow more or refinance at today’s low-interest rates, that could be a good idea when inflation kicks in. The fixed dollars that you pay back 5 years from now will be worth less than they are today.
- Short-Term Bonds: If rates rise, as is often the case during inflationary periods, then bond prices will fall. Stick with short-duration bonds that get reinvested more often.
Is it going to be temporary or long-term and what to do with your investment portfolio? How should you adjust your portfolio, your investments? Given the coming inflation, we discuss all the ins and outs on our radio show today. So I hope you enjoy it.Matt: [:
last night, but otherwise, ready to go.Matt: [:
It's also equally hard to know. Where many indicators of health and our economy will go. in the future. One of the. Big topics of discussion in recent weeks has been inflation. Now there's a lot of reasons for that that we could get into right, as the economy comes out of its COVID induced coma.
It's having lots of imbalances in who can hire and who can access their full supply chain. And Yeah.
People are bidding up prices. Anyway, there's all kinds of economics going on here, but for people who are investing for the people, listening at home inflation can have consequences for your personal financial portfolio, your investment strategy.
Let's talk about it. So, Mike what are your current thoughts and expectations when it comes to inflation?Mike: [:
So I have no idea. If we're going to get a low inflation medium, we're going to have a spike of inflation. If it's going to be. Temporary inflation is going to be long-term inflation. I have no idea, but what I do know is that you need to be prepared for all of those situations, as best as we can, things are gonna happen and we're going to have to adjust, but you should have a portfolio and personal finance situation that is prepared no matter which way inflation ends up going.
And those are some of the things that we can talk about today.Matt: [:
You want to have your house. Weatherized you want to make sure you have gear for going out and in inclement weather, it sounds like it's the same thing with your investment portfolio. You don't know what's coming. So the idea is for a variety of future scenarios, how do you put yourself in the best de-risked position as you can So how do you do that? How do you prepare or plan for the possibility of inflation or for the possibility of low
Again, no matter what happens, so you can read the news and the news is full of. Headlines that get you to read them. So that's why we're reading a lot about inflation and it's all over the place. Cause it's scary. And they want to make you scared. And it's all about reading articles. That's what the news is all about.
But when it comes to your personal finance, have a well-prepared plan, no matter what happens. So in that case, let's talk about last year in the, and the markets, have a sudden dip and then they come back. Did you buy, when things went down, when they were on sale, did you have a portfolio that you just held steady?
Throughout that. So knowing ahead of time, oh, if this happens, then I will do this or I will do nothing is the right way to be prepared so that no matter what comes at you,
ready for it.Matt: [:
comes to your investments, would you make specific preparations or would you take more of that? I'm going to hold steady type
If you have that kind of planned out. Then you do nothing and you just get ready for whatever the markets do next. Okay. So that's always my first take. Now the question is, do you have that, are you well-prepared, what does that mean? So having a good well-diversified portfolio for the future, a mix of stocks and bonds that's appropriate for your level of risk and where you are in life, all those kinds of things.
If you have that in place, you can keep chugging along. Now. Remember, stocks are a good place to be. You'll hear a lot of scary stuff about, oh, maybe get out of stocks. Remember that inflation we're buying products from companies and during inflation, those products go up in price that's inflation.
So those companies are making more money. So therefore your investment in that company is worth more money and your investment in that company should go up. So stocks are always a good place to hedge inflation. All right, now there's other asset classes that we should talk about today and see if they might make sense in your portfolio .
And so those things would be commonly gold comes up all the time, commodities, bonds, and real estate. Those are those are the asset classes that are going to be talked about nonstop. Oh, they're good. Inflation hedges. You should be invested in these different areas. So we should tackle those different areas and see if are they good
or not?Matt: [:
Why would we worry? Why is inflation bad? Are there classes of investments or assets where it's going to be a headwind where you're going to be worried about holding
So now we have rising yields, rising interest rates, which is good for savers. If you're saving dollars, you're getting a better interest rate in your checking and savings account. But if you're holding an IOU, a bond for a hundred dollars, That might drop down to $90. So the price of that bond drops. So we need to be more careful in the bond allocation in our portfolio.
And that's the only place that I would have a recommendation for making a change. Matt would be in the bond allocation of a
well-diversified portfolio.Matt: [:
And that's an explanation that's okay, you haven't explained anything, but you have given me a lot of big words that you are there. I liked your explanation for that. A heck of a lot better bonds. Not so good stocks, maybe a little bit better. All right. You also mentioned commodities. Let's go there for just a second.
Because you teased it and it does seem like a place that people focus on in an inflationary environment. So what about a typical commodity,Mike: [:
That's why people like it and it's had good returns over the years. But if you look at the historic returns of gold first, they're not definitely tied to inflationary environments. So realize that they don't always go up when inflation goes up. That's not the case. They March a little bit to their own tune, the price of gold.
It's done well in inflationary
environments and it's done justMatt: [:
misperception out there that, that gold is a classic hedge? It sounds like
maybe not so
So does gold have a place in your portfolio? Perhaps I don't typically use it. And the reason why is because it doesn't have long-term historic great returns. Okay. So if you look at the returns of gold over the long-term, as compared to stocks, it's much less. And so I'd rather hold stocks in my portfolio.
If I'm going to hold them for 10, 20 years and want to use those, in the future, I'd rather have stocks
It's Hey, look, if there's inflation going on, what about crypto? It's not really subject to the same kinds of forces in the economy. Is that a good place to park yourself and tilt your investment portfolio to hedge
The problem with that argument, however, is that. Gold. It doesn't go up and down nearly as much as crypto has been going up and down. I mean, The volatility of the cryptocurrencies is massive. We all know that reading the stories it's going up and down and jumping all over the place. And gold doesn't do that nearly as much.
And so as a store of value, especially if you say, oh, look, inflation is going to be high for three, four or five years. I want get those tailwinds. I don't think cryptocurrency is going to be the place for that. It might go up massively, but I have no idea about that, but in terms of inflationary wins now, I wouldn't say crypto is a place that you want to be parking
some cashMatt: [:
Okay. Anything else on commodities we missed before we move on to
And so you get this kind of inflationary environment because of commodities, but it's usually ahead of time. Usually prices of those commodities are going up first. And then the price of goods has to follow because companies have to buy them and use them. So it's not always the case that once you think, oh, we're in an inflationary environment, those commodity prices might've already gone up.
And you've seen that the last 18 months that the price of commodities has really shot up. And so are they a good place to invest now for a future inflation environment? Again maybe not. I don't use them too often in portfolios again, because there's other places that I'd rather put my money within stocks and bonds and not get into commodities again, March to their own tune.
So they can be good as a diversifier,
but you have to know what you're doing.Matt: [:Mike: [:
First of all, everybody thinks of their own home. And your own home is one of the best places to have a fixed mortgage during inflation. And the reason why is because
The dollars are going down in value. you need more dollars to buy the same amount of goods, right?e future. So if you're paying:
And so your home is fixed. Mortgage is one of the best places to have things to have during an inflationary environment. And hopefully your home price goes up as well. Now. Real estate investments are another thing you can invest in rental properties. You can invest in public REITs, real estate investment trusts that have either commercial properties or retail properties.
If you have your own rental properties, you're hoping that rents go up. And that can be true in inflationary environments. That rents also go up, but it's not necessarily true. Think of the last 12 months, what happened to rent in certain areas they've stayed flat. They've gone down. So if you owned a condo in a downtown area and everybody's leaving.
It doesn't matter if it was an inflationary environment or not, there are other forces involved, so it's not always the best place to be putting investment dollars. And the same is true with REITs that there are other forces at play, not necessarily just
the inflationary environment.Matt: [:
less.Mike: [:Matt: [:
over time. And so
you alluded earlier to where you could be facing headwinds and you alluded to bonds. So how does one then. Think about dealing with bonds, because it seems like that's the inverse of that situation where you're going to be paid a set amount that's worth less and less as you move into the future.
So what do you do? Do you just drop
I think. This past year and even right now is a great time to be refinancing, locking in low fixed term rates. So there's something I would definitely look at doing. If you're in a situation where you could borrow more money on your house or that's comfortable, or you can do that. I look at low rate, fixed term long-term mortgages, but depends on your situation now.
So it's a reverse bond. So where do bonds fit in your portfolio to your appointment? If inflation spikes up and rates yields on bonds, start going up the price of those bonds go down. So if you hold a 30 year treasury bond, That could potentially be worth less if rates go up. So you're losing money on holding that bond because you're getting that fixed coupon and those dollars are worth less and less over time.
So there are two changes that I would look at. One have short-term duration bonds, short-term bonds, short-term government bonds. These are very short-term, they're hardly paying anything, but that's not the point. The point is you are getting rid of your inflationary risk. And that's really good. I recommend short-term bonds pretty much all the time.
Anyway, the reason why is I'm not looking to make a lot of money on the bond allocation of the portfolio. If I'm looking to take on more risks to try to get more money in the future, or have that grow, I'll do that on the equity side. So I would say, take 10% more
risk on equitiesMatt: [:
Other people do it differently, but that's how I tend to do it is just stick with the short term bonds. So if you have longer, medium term, longer term bonds, you can look to shorten the duration of those bonds.
That's the first thing I would look at. The other thing is there are tips, right? And so these are inflation protected. Bonds now the way these work is that they get less interest rate now, but they add in the inflation. Okay. So if inflation goes up by 1%, you get that extra kicker. All right. So that is built into the price.
So if we get what everybody thinks is going to happen, you'll get, fairly nominal return on those inflation protected bonds. But if inflation is higher than people predict, or it spikes, that's where you can get a little bit of a kicker from having those bonds in your portfolio. So I'd look at that in the bond side of your portfolio, I'd look at both shortening the duration of regular bonds
and adding inflation, protected bonds.Matt: [:
just to protect yourself in case we do get
plays out, what actually happens.Matt: [:
now?Mike: [:look back to the beginning of:Matt: [:Mike: [:Matt: [:Mike: [: