Now that inflation has gotten everyone’s attention, the Fed is finally going to take action. On Wednesday, the Fed forecast three interest rate hikes in 2022 to fight inflation. The market cheered, with the Dow gaining 383 points. The gain of the Dow after the announcement underlines the public’s lack of a grasp of basic economic fundamentals.
For months, investors had been told how bad inflation was, how it was approaching runaway territory, and how this was bad for the economy. They were also told that inflation could be slowed by the one thing that has always worked – by the Fed raising interest rates. They didn’t know exactly how it all worked, but that’s what they were told, so they went along with it. So, when the Fed announced measures to fight inflation, the knee-jerk reaction by the average investor was to rejoice and double down on the stock market.
What gets lost among Main Street investors is that while interest rate hikes may slow inflation, it presents another set of problems that the investing public fails to acknowledge. Higher interest rates mean higher costs of borrowing for both consumers and businesses. Higher costs of spending will mean less spending, which will eventually hit corporate bottom lines and drag down stock prices and trigger an economic retreat.
Inflation, recession… it doesn’t matter. If you’re heavily allocated to stocks, neither scenario is good for your portfolio. So, while the average investor waits with bated breath on every move the Fed or market makes, another group of investors receives every piece of news with a sigh. Why?
Sophisticated investors like ultra-wealthy individuals, institutional investors, and university endowments allocate their portfolios to insulate against both inflation and downturns. That’s why they’re less occupied by market news than the average investor.
What kind of assets can insulate a portfolio from inflation and downturns? Essential assets – non-luxury assets that consumers will always need to survive like food, shelter, and fuel. That’s why sophisticated investors allocate to certain classes of commercial real estate (CRE) that are least affected by big market swings.
Certain segments of CRE are more correlated to the broader economy, like office and retail, but some segments thrive in the face of both inflation and recessions.
History has shown that as economies and buying power shrink, certain segments of CRE like multifamily, self-storage, and senior housing stand pat. Multifamily at the affordable and mid-levels thrive as consumers downsize due to reductions in income from a downturn or reductions in buying power due to inflation. Demand and vacancies remain stable in certain CRE segments while the rest of the economy struggles.
In my experience, I would say that one of the main underlying investment motivations that drive the investment choices of the ultra-wealthy is the desire to be worry-free.
They create multiple income streams through passive investments, so they never have to worry about losing their jobs. They partner with experts through private offerings, so they don’t have to worry about day-to-day operations. Finally, they invest in assets like CRE to free them of worries of inflation and recessions.
If you want to learn more about investing worry-free, please get in touch with one of our representatives, and we will be happy to answer your questions and point you in the right direction.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.