inflationary times

How to Invest to Beat Inflation

photo shows an inflated dollar bill with a blue pin sticking out of it

The rising cost of living is in the news these days. After years of trying to raise the rate of inflation to 2%, the Federal Reserve is struggling with how to reduce it from even higher levels (not surprisingly, in our view).

We are not expecting hyperinflation; we don’t foresee a ruinous and sudden destruction of the dollar. But we know that persistent, rising inflation caused problems that vexed policymakers and people from the Nixon administration through Ford and Carter to Reagan.

And that could happen again.

After forty years of falling inflation, after a decade of near-zero interest rates, after rising budget deficits under presidents of both parties, after years of accomodative monetary policy by the Federal Reserve… it makes sense to invest with inflation in mind.

What does this mean? We have ideas, but no guarantees. The future is a place no one has been yet.

Our strongest conviction is about what not to buy: investments of any duration with fixed interest rates. Bonds not maturing for 10 to 30 years, paying in the 1% to 3% range, strike us as being excessively risky. If rates rise as investors demand more to offset inflation, the value of lower-rate bonds will decline.

What will a 2% bond be worth in a 4% world? (Hint: something below its face amount.)

Beyond that, ownership of things—in other words, equity—may benefit from rising prices. If prices for goods and services rise, companies that produce goods and services may see earnings rise. Imagine it. If a can of beans cost, say, $10 instead of $1, the food processor may have proportionately higher earnings.

Further, we notice that stock in producers of natural resources have sometimes proved to be a hedge against inflation, as commodity prices rise.

So, although inflation disrupts and distorts commerce, and stock prices will be volatile (as always), it may be better to own stock in companies rather than bonds. Stocks may rise as earnings rise. No guarantees, of course, and down years will occur from time to time, as always.

Clients, we’ve been working on these ideas for years. If you would like to talk about how they apply to your own portfolio, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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