Weekend Reading – Ask me anything on inflation edition
Welcome to a new Weekend Reading post: feel free to ask me anything on inflation edition!
I hope you’ve had another great week…
Before sharing some of my favourite finds from the personal finance and investing blogosphere, here are some recent posts:
Although I like indexed ETFs (and I own a few in my portfolio), a reminder that while indexing is good I feel knowing your financial behaviour and relationship with money is even better – I still don’t understand those advisors or others that commit to an all-or-nothing approach on investing.
Maybe they are trying to drum up sales for their work?
Even then, if you just index invest, you don’t need a financial advisor…
I updated my post about the tax treatment of Canadian dividend paying stocks here – how many Canadians can earn almost $50,000 per year, per person, tax-free without the Tax Free Savings Account at all (conditions apply)!
Weekend Reading – Ask me anything on inflation edition
A few weeks ago, I had the good fortune to spend some time with TD Direct Investing talking about inflation, how I’m managing my/our portfolio during periods of higher inflation, and what that means for my semi-retirement plans.
We didn’t cover every possible subject so I thought I would post some additional thoughts/context in this Weekend Reading of the Ask Me Anything on Inflation edition, including some ideas that didn’t make the final cut. Here goes 🙂
TD: You’ve been blogging for a long time about DIY investing and interviewed so many different types of investors. What are some of the biggest lessons you’ve learned that have helped you evolve as an investor?
Me: Know thyself. I think it’s critical to understand your relationship with money, early retirement, never retiring at all, or otherwise. Money is a tool for you!
TD: What are some of the biggest drags on investor returns, with inflation or higher inflation?
Me: Probably owning lots of bonds. I would worry about owning too much cash as well. Tech stocks is another sector not to be all-in on, since I think some diversification into other sectors is important:
Buffett on inflation:
“We have no corporate solution to this problem; high inflation rates will not help us earn higher rates of return on equity.”
TD: You mentioned that you haven’t needed to push back your early retirement due to high inflation just yet. What would it take for you to delay your decision and how are you preparing for that potential?
Me: A lot 🙂 I’ve been preparing for higher inflation (and interest rates) for years so this current climate does not have me worried.
TD: Any particular sectors interest you now, with higher inflation?
Me: Based on the chart above, I’ve been looking at a few stocks and sectors for some time now:
TD: In your experience, is there anything about this recent period of high inflation that’s different from past instances that caught you by surprise as an investor?
Me: Maybe just that this period of higher inflation has surprised so many people – I’ve heard many times folks “didn’t see this coming”.
That surprises me in fact, given how low, how long, interest rates have really been:
TD: You mentioned that diversification can be a helpful approach to dealing with high inflation, but the famous investor Peter Lynch cautioned against “de-worsification” where an investor is too diversified and waters down their portfolio’s returns. What do you think about that idea?
Me: Agreed. You can have too much of a good thing!
I have a 5% rule that I try and follow: I try to avoid any one (1) stock going beyond 5% of my overall portfolio value. This way, any one stock I own can “move the needle” when it’s worth 2-3-4% of my portfolio vs. <1%.
TD: How do you feel about cash during inflation?
Me: I always like having some 🙂 I wrote a post about my thinking:
A far more famous money expert from me thinks this way:
“We do it because cash is the oxygen of independence, and – more importantly – we never want to be forced to sell the stocks we own.” – Morgan Housel, The Psychology of Money.
TD: How would you consider adjusting your portfolio further if inflation pushed even higher to, say, 10%?
Me: I’m ready 🙂
If that happens, happy to stay the course:
- Own more Canadian stocks – a good proxy is an ETF that covers the TSX 60 (XIU) – but otherwise I like owning more of my Canadian energy, financial, utility and REIT companies that pay rising dividends and distributions, and
- Own more XAW ETF for international stocks (beyond Canadian borders/ex-Canada) – just in case!
I probably won’t own lots of bonds, if any, and I don’t right now. There are only (3) key reasons to own bonds IMO:
- Bonds can help your investing behaviour – helping you ride out stock market volatility– including being strategic to buy more stocks soon.
- Bonds can be used to rebalance your portfolio – helping you keep your portfolio aligned to your investing risk tolerance and therefore asset allocation (mix of stocks and bonds).
- Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming, near-term spending.
Otherwise, stocks and cash is my thing.
My solution for higher inflation:
- Keep some cash– cash is always handy, it’s liquid and versatile.
- Avoid too much leverage– large amounts of debt can be crippling when you least expect it.
- Keep a bias to equities in your portfolio – cash and bonds, can be losers to inflation and tend to trail equity returns over time.
Again, a major thanks to the team at TD Direct Investing for hosting me.
Weekend Reading – Tiny Thought of the Week:
Most information is irrelevant. Knowing what to ignore saves you time, reduces stress, and improves your decision making.
More Weekend Reading!
Should you Die with Zero? Of Dollars and Data thinks so, or at least die with closer to zero. Not an easy feat!
Congrats to Tawcan and his monster July 2022 dividend income update. He has invested a whopping $90,000 this year to date (yup, 8 months), an incredible savings rate.
80-something investor Gordon Pape shared in The Globe and Mail recently that he likes these three stocks better than any fixed-income GICs! (subscribers only):
- Bell Canada (BCE)
- TC Energy (TRP)
- Bank of Nova Scotia (BNS).
Liquid from Freedom 35 Blog believes your wealth might be a measure of your resourcefulness.
I would agree with his comment that “Money likes to multiply. It flows towards people who can multiply it the fastest.” This is big reason to get invested, stay invested, and keep investing. Regardless if your investing decisions are perfect or not, compounding and time will be your enablers.
Tom Drake wrote about some Costco pricing codes. Interesting stuff. I’m a terrible Costco shopper. I have a list, I get in and I get out quickly so I don’t spend too much. Boring I know but it works for me!
Back to stocks, stocks are the undisputed champion for long-term returns. Dale Roberts mentioned so! 🙂
Finally, related to stocks and inflation, you’ll want to have a bias to owning stocks vs. bonds vs. cash for sure. I’m at 100% equities (dividend growers and low-cost ETFs that pay distributions) with a modest cash wedge as I approach semi-retirement in a few years.
But you don’t just want to own any stocks.
Consider stocks that rock.
Have a great weekend!
Excellent AMA, Mark. I enjoyed watching the conversation between you and the TD rep.
Inflation is a real killer of savings. But staying diversified is one of the best suggestions for most people, as long as they follow some kind of guideline, like your 5% rule.
Thanks for reading and sharing my post this week. A great lineup of weekend reading overall. 😁
Yes, it is Liquid re: inflation. Definitely need a hedge against that in any portfolio!
Thanks for the kind words, it was fun to do with them.
Great article as usual, Mark. I could not agree more with you regarding the sectors and stocks to own during this inflationary period. Cash is still king when stocks are pulling back.
What do you think of the new green energy revolution taking place now when Biden signs the Inflation Reduction Act (IRA)?? Are stocks like PLUG, Bloom Energy, etc going to reward investors handsomely???
Good luck to you on your journey to total financial independence. You are just metres away now!!!
It will be interesting, what Biden, does, right?
Thanks for the kind words, Ken. Saving, investing and rinsing and repeating for a few more years 🙂