Weekend Reading – Fighting inflation edition

Weekend Reading – Fighting inflation edition

Hey Friends,

Welcome to my latest Weekend Reading edition – the how to fight inflation edition.

You can read my previous editions below:

Weekend Reading – Climate crisis edition.

Weekend Reading – all about taxable investing and the superficial loss rule here.

Earlier this week, I updated this popular post about how to achieve financial independence following these six simple steps.

The six phases of financial independence

Remember, when it comes to personal finance, the answer is usually “it depends” and even though things can seem very simple – they aren’t always easy:

Have a great weekend and let me know your thoughts about any articles below. I always enjoy reading the comments section! 

Mark

Weekend Reading

Ah yes, inflation…

What is inflation?

At the most basic level, inflation is an increase in the price of goods and services over time. 

What does that mean for you and me?

An erosion of purchasing power…

Earlier this week, I checked out an older article about inflation on A Wealth of Common Sense. In that post, Ben Carlson highlighted one of his favourite ways to combat inflation: the stock market.

“The stock market is a wonderful hedge against inflation for a few reasons. Since 1928, the U.S. stock market is up 9.8% per year while inflation has averaged 3% per year. So stocks have grown at nearly 7% more than the rate of inflation. One of the reasons for this is the fact that earnings and dividends also grow at a healthy clip above inflation. Over the past 93 years, earnings have grown at roughly 5% per year. Stocks also have perhaps the greatest income stream of any asset. Dividends have grown at roughly 5% per year.

So earnings and dividends both have a history of growing above the rate of inflation.”

Same thoughts here Ben. Complex problems can have some simple solutions. 

How am I going to fight inflation? 

These two ways:

1. Own more stocks than bonds – Like Ben, given stocks, historically, have been able to pass some rising prices back to the consumer, I’m going to continue to own my basket of stocks (including my dividend paying stocks) for the long-haul.
2. Own commodities and raw materials – unless you’ve been living under a rock, gas prices have really crept up of late, at least in my province. So, commodities are a broad category of things like oil and gas, grains, electricity, and other. Commodities and inflation have a unique relationship as you well know. Rising commodity prices are indicator of (more) inflation to come. As prices rise, so does production/manufacturing costs to turn materials into commodities that are bought and sold. So, you can already see by this simple explanation how owning commodities might be helpful.

While some consumer companies might do well in an inflation environment, I have some caution on that. Consumers can quickly decide what is / is not discretionary. Sure, toothpaste is very important but new Nike kicks in your closet is not. So, be cautious about owning some consumer stocks in your portfolio.

Update from 2021 to 2024: See Nike stock. Ouch – never owned it and never would!!!

My rule of thumb (even though I don’t own any Nike stock) for any one (1) stock is to keep it at about 5% of my overall portfolio. I answered that reader question and posted that answer on my popular FAQs page here.

Years ago, my friend Rob Carrick said for income investors, the best inflation hedge is a stock that raises its dividends every year.  For example, TD, National Bank and RBC have grown their dividends by between 7-9% annually (back then) – and the cost of living was up only an average 1.7% per year over the same period. You do the math – you tend to get ahead with stocks!

On Cashflows & Portfolios recently, we took a deep dive into inflation and more importantly what some of the best investments you can own to combat inflation.

Of course, you could argue some inflation is always very good. The economy is growing. Better than deflation. Deflation is associated with a shrinking economy and depressed times – less money in supply and therefore less money to spend.

Some reminders about inflation from our Cashflows & Portfolios post:

Inflation Losers:

• Inflation will hurt those who have a big bias to cash savings – should inflation continue.
• Retirees focused on fixed incomes might suffer.
• Borrowers who took on variable rates, and more…

Inflation Winners:

• Inflation will benefit those with large debts who are on fixed repayment plans over variable.
• Owners of land or scarce physical assets (like land, materials, other).
• Firms that can raise prices, rather easily, without too much trouble or public outcry, and more…

More inflationary reading:

With inflation here, this is how to generate retirement income.

I believe the permanent portfolio is another way to combat inflation or any economic condition. It was devised by free-market investment analyst, Harry Browne, in the 1980s. This portfolio is composed of equal parts stocks, bonds, gold, and cash.

How are you fighting inflation? What are you owning? Are you cutting back instead? Do share in a comment!

More Reading Fun…

A reader asked me about investing inside a corporation…you might recall I have this post on my site including some detailed considerations.

How to invest inside a corporation

U.S. early retiree and 30-something A Purple Life shared how she manages her money. Interesting to read about her cash wedge: she wanted to “Save a 2 year cash cushion ($40,000) because I retired into a recession and a pandemic.”  Smart.

You can read my thoughts on my planned cash wedge, and what my wife and I intend to save up in the coming years below:

How much cash should you keep?

How much cash should you keep?

…And, if you prefer a more structured approach, go with a mix of GICs and cash like this to cover at least 1-2 years’ worth of expenses should a bad stock market occur.

Retirement – Financial Independence

Check out some of these interesting articles…in this space:

Congrats to Leif and his 2-years since FIRE – from Physician on FIRE. “It’s been two years since I had surgeons, nurses, and patients depending on me to be in a certain place at a certain time to perform as an anesthesiologist. It’s been two years since I donned scrubs as an outfit, and I doubt I’ll ever wear them again.”

How can you retire on a lower income – using the Guaranteed Income Supplement (GIS)? Read on.

What about how to realize financial independence for newcomers to Canada? This another case study here:

Financial Independence for Newcomers to Canada

Thanks to my friend at Accidentally Retired for including me in an epic list of FIRE/Financial Independence blogger insights and survey answers. Very interesting to see what others’ value, what they want their post-FIRE life to look and feel like, and more. 

Other great, free, My Own Advisor content:

How I invest in dividend paying stocks is always found here.

Why I invest in low-cost ETFs – along with dozens of articles about ETFs can be found here. 

Looking for free calculators, tools, or even my support? Check out my Helpful Sites page here. 

I regularly update my FAQs page here. 

I might be approaching 30 free, retirement case studies you can learn from here. More to come!

Have a great weekend!

Mark