Napoleon Bonaparte is considered one of the most skilled conquerors of all time. He was a cunning military strategist that commanded French Armies for well over a decade, leaving the skeletons of many empires in his wake.
In 1812, Napoleon led an army into Russia for retaliation from Russia's removal from the continental system. As many countries would have, Russia could have adopted a very aggressive approach to Napoleon's attacks. However, they did the exact opposite. They let Napoleon walk right into the country. They simply drew him further and further in burning their own cities as they did to limit the resupply of the Napoleon army.
Napoleon, not prepared for a drawn-out conquest, was equally not prepared for the risks that lay ahead of him. In the end, it wasn't the Russian armies that defeated Napoleon, but the risk of the unseen attacker that Napoleon didn't see coming – a Russian Winter. Of the half-million soldiers that came into Russia, only about 100,000 came out.
In the next few years, you'll see that your favorite products will cost more than what they do now. This is because of inflation and how it affects our economy. Inflation is a national economic phenomenon where prices for goods and services go up over time.
So this means even though you might not notice it today, tomorrow everything will be more expensive. This slow creeping deterioration of the dollar can have a marked impact on millennial's ability to build wealth.
Imagine setting an ice cube on your kitchen table. Will that ice cube stay frozen? No. Will you actively see it melting? No, it happens too slowly. You will see the puddle start to form, though. Now imagine that same situation with the US dollar. The US dollar, slowly losing its value over time, is inflation. You won't see it happen, but you will see the puddle – the slow rise in the prices of the things you love.
If you had a dollar in 1800, that would now be worth the equivalent of a nickel. You would need $20 to show at the dollar store! That's inflation.
It probably goes without saying that inflation is hard to measure accurately in something as large and complex as prices in the US economy. The consumer price index (CPI) has become the standard measurement of inflation. The consumer price index tracks a basket of goods to represent the increase in prices in the economy.
CPI is far from a perfect solution to understanding the inflation in the economy. Still, it's important to understand the numbers the market is looking towards for someone trying to understand how inflation will affect their portfolio.
The average rate of inflation or increase in the CPI will depend on the time frame you're looking to analyze (as well as the region). For example, over the past ten years, price increases have been more pronounced in San Francisco than in Oklahoma. Since 1990 the US has had inflation of over 5% and periods of deflation (negative inflation or the decreasing of prices).
The federal reserve historically has targeted a rate of 2% inflation. As of this week, it's currently at 5.4%
Cash is not your friend in inflationary environments. As we mentioned above, inflation is the dilution of purchasing power.
Like cash, bonds (at least most bonds) don't do well in inflationary environments because the interest you're getting back is fixed. So, the dollars you get, receive as interest (and return of principal payments) become worthless and less.
If inflation increases, the Federal Reserve will likely have to end its easy-money policies, which means that asset prices such as stock could take a hit. Companies have gotten fat and lazy off cheap debt. If easy money ends, the tide will go out, and as Warren Buffet would say, that's when you see who's swimming naked.
These are ways to mitigate the effects of inflation:
Shameless plug here. We here at Vincere Wealth have been talking about inflation for a while now. We've also been preparing our clients for inflation. We can help you too. Click here to schedule a 1:1 with one of our advisors.
Get investments that work well in inflationary environments. Adding investments such as commodities, real estate, emerging markets, gold, and bitcoin to your portfolio can help hedge your wallet against inflation.
Trend following isn't an asset in the traditional sense but a way of investing that allows you to invest in assets while staying adaptable by applying a rules based approach to get out of what's not performing well. This is key to getting out of assets that don't do well in inflation and getting in assets that do well in inflation.
Commodities are the price of "things" or economic inputs. As prices go up, so do commodities.
Real estate (primarily rental properties) does well in inflation. As prices go up, so do rents. Plus, a mortgage is the opposite of bonds. You're paying the bank back with cheaper dollars.
5. GoldGold is the antithesis of inflation because you can't inflate a hard asset like gold more than you can dig it out of the ground. When people fear inflation, hard assets like gold look very appealing.
Emerging markets tend to correlate to commodities in inflationary environments.
While unproven in inflation, bitcoin offers a lot of similarities to gold on the hard asset front.
Right now, debt is cheap. We are at some of the lowest interest rates in history! If you're going to take out leverage (say, a mortgage on a rental property) ahead of inflation, while low rates are an excellent time to do it. Your costs are low, and you'll be paying back the bank with cheaper dollars.
If you're working hard to pay down your existing mortgage quicker, then you may want to consider just making the minimum payments because, again, you can pay back that mortgage later with cheaper dollars.
One key thing to mention here is that I'm specifically speaking to FIXED interest rate debt. If you're in variable rate debt, it's a different story. Rates are likely to up if inflation takes off, so you're better off not having the debt or refinance to cheap fixed debt.
The Russian winter is coming (if not already here). Make sure your portfolio is ready.
We can help. Schedule a call to chat with one of our advisors.
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The Russian winter, a.k.a. inflation, is approaching the United States. We discuss the best strategies to invest in order to protect yourself from future inflation in this article.
The Russian winter, a.k.a. inflation, is approaching the United States. We discuss the best strategies to invest in order to protect yourself from future inflation in this article.
The Russian winter, a.k.a. inflation, is approaching the United States. We discuss the best strategies to invest in order to protect yourself from future inflation in this article.
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