In response to the financial devastation brought on by the COVID-19 pandemic, the government has pumped trillions of dollars into the economy through stimulus programs like the CARES Act.
With that much money being infused into the economy and economic red flags, the fear is that inflation or worse, hyperinflation will follow.
Inflation is often met with fear and loathing, but if you truly understand inflation, you can use it to your financial advantage. Inflation is not the enemy. All it is an index measuring the price of goods.
When you think about inflation don’t shoot the messenger.
Case in point, investors tend to react to inflation like their house is on fire. In a rush of judgment, they’ll run from inflation to only find themselves in another burning building.
First, let’s understand inflation. Inflation measures how much more expensive a set of goods and services has become over a certain time.
A common discussion surrounding inflation is how much a dollar will buy today compared to a certain point in time in the past. A dollar had a lot more purchasing power back in 1918 vs. today.
Inflation is a measurement. It’s not the cause of increasing prices or the erosion of your buying power. If we understand inflation, we can learn to adapt to it. Just like a greater understanding of hurricanes and how they form, meteorologists and scientists can predict their paths and intensity to a certain degree and warn people in their path in advance to find shelter.
If we as investors can understand inflation and what it is telling us about the underlying economy, we can dampen its effect on our portfolios, and in some cases even profit from it.
I’ll explain below:
The unfair characterization of inflation has long been held by top bankers, leaders, and politicians – usually for nefarious reasons. They all have something to profit from by sounding the inflation alarm.
Did you know inflation was once declared Public Enemy No. 1 by President Gerald Ford in 1974? How many politicians have stormed into office promising to battle inflation? And how many central bankers have designated themselves inflation busters? Fighting inflation makes them all look like heroes.
Forget the politicians and the bankers. Let’s dig deeper.
What measures inflation?
The consumer-price index (“CPI”) does. The CPI refers to the rate at which prices for certain products have increased. Specifically, the CPI measures the price increases for a basket of products and services – including food, gas, energy, utilities, clothes, automobiles, plus transportation and medical services — and is a widely monitored economic indicator – affecting both the public’s buying and investing choices.
Wall Street has been riding high lately after dropping 30% in the early days following the start of the COVID-19 pandemic – even nearing last February’s record high as recently as August.
Despite Wall Street euphoria, many experts think stocks are overpriced and that the market is due for a huge correction, with investors fearing the Fed will cut interest rates in response to recessionary fears – fueling inflation. Whether that’s the case or not, you can be prepared for whatever scenario develops.
For the investor, the biggest lesson for you to learn from inflation is that any investment that doesn’t keep pace with inflation is a loser in the long run.
Hitting inflation head-on is the key to surviving it not running from it.
- Sitting your cash on the sidelines is the worst thing you can do.
- Putting $100 under the mattress will be worthless in ten years than it is today because of inflation.
- Most savings accounts and CD’s will not keep up with inflation.
- Stocks and gold are both highly speculative, volatile, and are also not reliable for keeping up with inflation. In fact, in an economic downturn, stocks will assuredly run the other way.
The ideal investment in inflationary – as well as non-inflationary times – should appreciate and produce income to stay ahead of inflation to avoid losing value over time like money under the mattress, savings accounts, and non-appreciating tangible assets.
The key to surviving, even profiting from, inflation can be found through a deep dive into the CPI.
According to a recent government CPI report, the government identified the biggest factors for a recent jump in the CPI and those factors came from an increase in the price of gas, medical care, housing, and shelter. It seems to me that investing in one of those asset classes where prices rise with inflation would be a sure way to combat inflation.
But where to invest?
Out of all the inflationary assets listed in the government’s CPI report, there is one asset that stands out as being the most accessible to everyday investors – housing and shelter (a.k.a. real estate)?
In today’s investing market with relaxed securities rules that have made private placements and crowdfunding more accessible to more qualified investors than ever before, real estate is something almost anybody can invest through one of these platforms.
And just like inflation, the value of real estate has risen reliably and consistently throughout recent history. It’s had its ups and downs but real estate has always trended upward and will always continue to do so.
Real estate is the one investment that could appreciate with inflation and in economic downturns, with some classes of real estate such as affordable housing and rentals experiencing higher demand as people downsize with a shrinking economy.
As an investor, the more you understand inflation, the less you’ll have to fear.
Knowledge is power and knowing that inflation will always be steady and upward, tailoring an investment strategy around rising prices, you can profit from inflation instead of running away from it.
In noninflationary as well as inflationary times, real estate has historically been one of the best ways to invest your money. With income-producing real estate, you can build and grow your money, rather than watching it lose value.
That’s because shelter – like food and other essential goods – is demand inelastic. People are always going to need it. That’s why prices of certain segments of shelter like multifamily and affordable housing rise with inflation. With diminished buying power, people downsize.
With diminished buying power in inflationary times, real estate can add another benefit to fight hard times – cash flow.
Commercial properties that generate monthly income that is independent of world news or changes in the stock market is the ideal antidote to hard times. And just like with real estate values in general, rental prices also rise with inflation. The reason why is related to the nature of an inflating economy.
In an inflating economy, the price of everything is increasing and so are worker wages. While your costs are going up, generally, so are your wages. Because worker wages are on the rise, property owners can raise their rent accordingly and not lose tenants. As a result, just like with property value, the rental income you collect as an investor will rise with inflation.
Smart investors can stay ahead of inflation by investing in real estate.
Investing in the right segments of real estate like multifamily and affordable housing that cash flow will protect you from inflation in a variety of ways including:
- Preserving the value of your asset as the price of your real estate rises with inflation.
- Preserving income as rents can be raised to keep pace with inflation.
In the end, inflation can be used to your advantage.
By accepting it and embracing it for what it is, you can turn the investment tables and thrive in any economy.
Investor, writer, speaker, and founder. Kyle Jones, key principal of TruePoint Capital, is accountable for investment decisions, asset management, and overseeing financial activities, operations, and investor relations. Kyle additionally is a Global Sales Leader for a large Fortune 100 technology company. Kyle received a Bachelor of Science degree from Texas State University – San Marcos.