Are you prepared for an ever-increasing cost of living? You should be. There are two main reasons for the coming rise in prices. The first is monetary inflation. In an attempt to stimulate the economy and minimize unemployment, in response to Covid-19, our government printed and invented gobs of new dollars. When the money supply is increased it makes all the dollars in our pockets and savings accounts become worth less. It takes more dollars to buy the same physical stuff. Therefore, monetary inflation is here.
The second reason for the coming rise in prices is commodity inflation. With a rising middle class around the globe, there are more people who want the same stuff we want. There is only so much stuff to go around and thus the cost of gasoline, steel, gypsum, timber, copper, and other commodities is going to rise as people from around the globe all bid on a limited supply of stuff.
So higher prices are coming and we need to prepare for that. But how? You could own the stuff that is going to get more expensive by buying commodities. But owning commodities could be complex and expensive (think storage and markups when buying and selling.) You certainly don’t want to be owning bonds because bond prices fall as interest rates rise. Governments raise interest rates to slow an economy and to battle inflation. As inflation rears its ugly head, the government will raise interest rates, and the value of older existing bonds, those paying older lower rates, will fall. Cash never gets you anywhere. Real estate prices will rise but owning real estate is like owning commodities and is fraught with challenges of maintenance and transaction costs.
Over history, the best investment in inflationary times has been ownership of the great companies of the world. As prices rise, companies are able to increase the prices of their goods and maintain and increase their profits. Higher profits beget higher stock prices. Higher stock prices mean your retirement portfolio increases in value which provides an ever-increasing income stream that cannot be outlived. Owning Amazon, Microsoft, and Netflix, and sharing in their profits, is your revenge for higher prices.
Obviously, you do not want to move all of your assets into stocks (or anything else for that matter.) A prudent, balanced portfolio customized to your family’s particular needs is the best approach. Stocks for inflation protecting growth, bonds for income and stability, and cash for quick liquidity are the building blocks of any great investment plan. You just need to figure out the proper mix.
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