How to survive high inflation




It’s a surprise to no one that prices are higher since a year ago, and even a couple of months ago, as gas prices in L.A. have reached $5+/gallon in most locations, and CPI - the national inflation measure - shows a rate above 7% annualized; something not seen in 40 years! The government isn’t making this easier despite blaming it on global shipping issues and other related supply shocks; the Federal Reserve, as well as most other major central banks, are keeping rates low and maintaining stimulus despite high inflation. Explaining away the problem isn’t putting food on tables and helping consumers. So what can investors, who are looking to maintain their purchasing power, do during these difficult times?


We’re in undiscovered territory. The western world still operates at historically low interest rates despite currently high inflation; something not seen before. A US 10-year government bond pays as little as 1.48% interest while a German equivalent is -.35%. Economist, Mohamed A. El-Erian, on Face the Nation, blamed the Federal Reserve for miscalculating efforts to reduce inflation. The Fed still maintains significant economic stimulus despite high inflation and suggested that it’s incorrect to call current inflation “transitory” as there’s a likelihood for the normalization of the current inflation trend. A combination of desperately needed infrastructure spending (est. $3.4 tn), ongoing Fed bond purchases, Omicron threat, geopolitics, and maintaining low interest rates can easily compound the issue of higher inflation for the foreseeable future. Assuming this is the new normal, here are a few strategies investors can take to protect themselves.


Keep a low cash balance


Cash is the first to lose purchasing power. If inflation is 7% and the bank is paying zero interest, then cash is guaranteed to drop in value by the difference. Pragmatically, it’s necessary to maintain enough cash to pay bills and for an emergency but amounts not immediately needed should be allocated toward investments.


Invest in real assets


House prices are at all-time highs yet real estate, and other commodities, have historically been the best way to maintain purchasing power followed by stocks. Last week’s news that the Fed may scale back their bond purchases next year put all markets, including stocks, crypto, and bonds, into a frenzy, suggesting that no investment is safe should rates rise. At least with real estate, you’ll have a place to move into should this analysis not work out.


Invest in stocks


You can pick the amount of risk you’d like to take by allocating your stock mix toward energy companies and other value companies that pay a dividend, have lower volatility, and have shown to withstand inflation. Market volatility is expected so investors must maintain a long-term time horizon for any investment decision.


Borrow and/or refinance


As interest rates remain at historic lows, it is extremely beneficial to borrow at 1-3% interest while inflation is at 7%. By the time you pay this back, the lender would have received less than what you've borrowed, net of inflation.


Cash value life insurance


Some index life insurance products offer an investment floor of 0% and max earning potential of 12%+/- per year offering another guarantee of an investment return during a period of high inflation and market volatility.


Put $20,000 in a US Government I-Bond


The government I-bond is an inflation-linked bond, currently paying 7.12% and you can put $10k into it before the end of the year and again in January, effectively allocating $20k into a guaranteed, high rate bond redeemable in 1 year. But, it’s worth keeping longer so you can collect on this interest. Learn more at treasurydirect.com.^2


Market volatility and high inflation are a dangerous combo and should be expected as the new normal. Prudent financial planning may help you limit some of the impact by re-evaluating your risk and investing high cash balances. Although no investment should be ultimately considered “safe,” the data shows that stocks have done well to survive inflation over the long-run.


At Eureka Wealth Management, I help my clients manage their investment risk holistically during higher risk economic times. I also do retirement planning, insurance, and tax/estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com



Sources:

https://www.bloomberg.com/news/articles/2021-12-11/the-inflation-pros-from-argentina-offer-tips-for-rattled-americans

^2: https://www.cnbc.com/2021/12/10/couples-can-fight-inflation-with-7point12percent-risk-free-interest-on-40000-.html