Are you ready for the Fed’s war on inflation? The first shots have already been fired, and there’s a long road ahead before the Fed can declare victory.
So far this year, the Fed has fired four shots toward inflation to corral rising prices. By four shots, I mean raising interest rates. Last Wednesday, the Fed raised rates for the fourth time this year, increasing the overnight interest rate by 0.75% for the second time in a row. So far, the Fed’s aggressive moves have not made a dent as inflation hit another 40-year record in June with a rate of 9.1%.
What’s the reasoning behind the Fed raising interest rates?
The logic is that by raising the cost of borrowing, consumer and business spending will go down as the real cost of goods (when factoring in the cost of borrowing) increases. As demand goes down, so should prices. The question is how long it will take before prices respond.
As history indicates, the road ahead could be long and bumpy.
The late 70s were another time of raging inflation and high fuel costs. In late 1979, on the eve of the Reagan era, a new Fed chief was appointed to adopt a more aggressive monetary policy to curb inflation. The resulting war on inflation was not pretty, with plenty of collateral damage produced as a result. The Fed’s aggressive rate hikes during that time resulted in a recession in 1980 and another one that lasted from 1981-1982. Those recessions were painful, with unemployment reaching as high as 11%. We could be in for more of the same in this latest go around.
As interest rates rise and the cost of consumer and business borrowing increases, reduced demand goods and services hits corporate bottom lines, inevitably hitting stock prices. During the 1980 recession, the S&P 500 fell 19.83% from its highest point. During the 1981-1982 recession, it fell 28.39%. Retirees relying on their 401(k)s, IRAs, and mutual funds felt the pinch of their shrinking portfolios during this time.
Is your portfolio ready for a 20%, 28% hit to its value?
Are you in harm’s way of the Fed’s war on inflation?
How do you insulate yourself and your portfolio from inflation, recession, and all the other uncomfortable consequences on the horizon (i.e., unemployment, shortages, etc.)?
Smart investors are out of harm’s way of the war on inflation because they are always out of harm’s way. They don’t wait until the last second when the alarm sirens are blaring before getting out of town. They’re already out of town – probably sipping cocktails on a beach.
What do smart investors do to prevent falling victim to economic uncertainties? They invest in certainty. How?
- They invest in goods and services that are certain always to have demand – goods like shelter, food, and fuel.
- They invest in alternative assets like commercial real estate and private companies (i.e., private equity) insulated from Wall Street volatility and uncertainty.
- They invest long-term to smooth out any short-term hits to value.
- They invest for passive income to generate certain and reliable cash flow.
- They invest in assets that preserve capital and, in some cases, grow capital in recessionary and inflationary times.
Invest in Demand.
Investing in goods and services with inelastic demand is ideal for buffering a portfolio against downturns and inflation. In the case of affordable housing like mobile home communities (MHCs), inelastic demand means being able to raise rents that keep pace with inflation without sacrificing occupancy. MHCs have proven their resiliency repeatedly, especially during the last two significant downturns – the Financial Crisis and the COVID-19-induced recession – where the MHC sector actually saw rents rise while vacancies dropped.
Invest in Alternatives.
Alternative assets are illiquid. CRE and private equity are not traded on public markets and are therefore insulated from the herd behavior and behavioral biases that drive the stock and crypto markets. They are insulated from market triggers like the news cycle, economic indicators, social media, and talking heads. Alternative assets are insulated from broader market volatility.
Invest for the Long-Term.
Investing long-term means sacrificing liquidity, but smart investors crave illiquidity. Long-term, reliable assets like certain segments of CRE and private equity iron out any short-term drops over time. This gives investors peace of mind and the certainty of knowing that their assets will perform in the long run.
Invest for Income.
Passive income generated from in-demand, reliable assets insulates a portfolio from loss when that income is reinvested and compensates for any potential job loss or reduction. That peace of mind in uncertain times is invaluable.
Assets that generate income that keep pace or exceed inflation are the ideal counter to rising prices. So, even as rising prices erode wages and buying power, passive income that equals or more than compensates for that erosion is what keeps a portfolio afloat.
Don’t be a victim of the Fed’s war on inflation.
Get out of harm’s way by investing in the right assets built for withstanding any economic shock.