Weekend Reading – Fighting inflation edition
Welcome to my latest Weekend Reading edition – the how to fight inflation edition.
You can read my previous editions below:
Earlier this week, I updated this popular post about how to achieve financial independence following these six simple steps.
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!
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? Let me count thy ways!
- 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.
- Own REITs – again, historically speaking, whether you are investing in real estate directly or via rental ownership or owning publicly traded Real Estate Investment Trusts (REITs), or both (like I do!) – owning real estate can be a nice hedge for higher inflation. Why? Home values and rents tend to rise during inflationary periods. I mean, people have to live somewhere…
A good example? Canadian Apartment REIT just increased their dividend by 5%. I happen to own a few hundred shares of it.
- 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. I think you’d be wise to keep any one sector even if you love it at no more than 20% or so as part of your overall portfolio.
My rule of thumb of any one 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 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 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.
If you want to take a Canadian-look into the Permanent Portfolio, look no further than our friend’s site at Cut the Crap Investing run by Dale Roberts.
How are you fighting inflation? What are you owning? Are you cutting back instead? Do share in a comment!
More Reading Fun…
Another Loonie wondered how much is working from home really worth? I suspect the mental wellness savings/benefits could be huge for some…and hard to quantify!
You might recall I have a similar post on my site including some detailed considerations.
Boomer & Echo highlighted some overconfident investors, citing some research from Larry Swedroe. From the article: “According to Swedroe, individual investors tend to trade more after they experience high stock returns.” Well, those types of blanket statements are not helpful from Swedroe since many investors I know buy and hold – they are not active traders.
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:
…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.
Always good to see what the ever-popular Mr. Tom Drake is up to. This week, he was joined by Michael Dominguez. Michael is a successful real estate agent and investor who, along with his wife, owns more than 10 investment properties in Ontario.
Thanks to GenY Money for including me in your latest PF roundup!
Does astrology affect your personal finances? Maybe?! Read on via Liquid Independence here.
Dividend Hawk continues to grow an impressive income stream.
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.”
Nice stuff on Accidental FIRE: I didn’t dream big, you should!
What about how to realize financial independence for newcomers to Canada? This another case study here:
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.
Save, Invest, Prosper!
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I might be approaching 30 free, retirement case studies you can learn from here. More to come!