Introduction
Who can remember the 1970s?
The 1970s were a time of high inflation. The economy experienced a period of stagflation, which is when there’s both high inflation and high unemployment at the same time. It was also a time when the stock market suffered from high volatility—meaning that there was a lot of fluctuation in prices. You can see this in the chart below:
Inflation is one of the most important financial concepts to understand, because it affects all aspects of your life. Inflation can be defined as a sustained increase in the price level, or how much things cost over time. The result is that you have less purchasing power than you did previously.
1 – Inflation Is Really Bad For Cash
Inflation is simply a rise in the general level of prices of goods and services in an economy over a period of time. In other words, inflation means that your money loses its purchasing power as time goes on.
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. The most common measure of inflation is the consumer price index (CPI).
If you want to protect your wealth from inflation, you need to invest it in assets that are rising in value faster than inflation. Historically, equities have outperformed inflation at a higher rate than most other asset classes.
2 – Inflation Has Many Causes
Inflation is a common economic problem that affects the daily lives of people all over the world. It occurs when there are significant increases in the general price level of goods and services.
Inflation has many causes. These include:
Supply and demand
Inflation can occur when the demand of a product or service exceeds the supply for that product or service. If there is more supply than demand, prices can decrease. On the other hand, if there is more demand than supply, prices can increase.
Monetary policy
Central banks, such as the Federal Reserve Bank, control monetary policy by raising (or lowering) interest rates and/or printing more money. When interest rates are lowered and/or more money is printed, it causes inflation by increasing money supply in circulation.
This lower purchasing power of currency and makes people spend their money before prices go up.
Deflation
“Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.” (Investopedia) Deflation has an impact on borrowers since they are paying off debt with money worth more than what they initially borrowed.
Contractionary fiscal/monetary policy and your portfolio
Contractionary fiscal policy is one-way governments try to keep inflation in check so they don’t have to deal with all this other stuff happening in the economy. It basically means that the government will raise taxes or cut spending in order to balance its budget when there’s high inflation (or even just lower-than-expected growth). This reduces demand for products and services which helps slow down inflation.
Contractionary monetary policy is when banks make loans less available and interest rates go up potentially. This provokes people to spend less money (because they have less access to credit). This in turn means businesses sell less stuff (because people aren’t buying as much), resulting in rising prices because there are fewer buyers for all those products.
3 – Interest Rates And Inflation Are Typically Tied Together
If you’re investing for the long term, you need to understand how interest rates and inflation are tied together. The two can be confusing at first, but once you get your head around them, they’re easy to understand.
Interest rates typically go up when inflation goes up, and inflation usually goes up when demand for goods and services goes up.
Put another way: inflation is a rise in the general level of prices related to an increase in the money supply; it’s not just about rising prices for a few things like groceries or gas. Inflation is when everything costs more. And when everything costs more, people have less money to spend on the things they want — like investments.
Inflation is a major concern for investors because it erodes the value of their principal and returns over time by reducing purchasing power.
Why are interest rates and inflation so closely linked?
The answer is that the central bank influences interest rates which can affect inflation. It’s the central bank that sets the base rate, or the rate of interest banks charge each other for overnight loans. It’s also the central bank that determines how much money is created in an economy. This means they have a lot of control over how much cash people have to spend and invest, which in turn affects prices.
If you’re looking for a more detailed explanation of how inflation is caused, here’s a brief rundown of the main factors:
Inflation is caused by an imbalance between supply and demand in an economy, which leads to a shortage of goods and services relative to money. If there are more dollars chasing fewer goods and services, prices will rise — which is exactly what happened during the 2008 crisis when investors fled stocks for bonds because they felt safer with fixed-income securities. This forced bond prices higher, meaning yields fell sharply as demand skyrocketed while supply remained stagnant. That caused a spike in inflation as investors bid up prices for everything from food to real estate in an attempt to preserve their wealth.”
4 – Don’t Forgot Bonds Can Lose Money Too
There is the general idea, almost mythical, that a bond is a super safe investment that cannot lose money. When interest rates rise, bond prices decline. Issuers may experience negative credit events such as bankruptcy or default, and regulatory changes can have an impact on bond returns as well.
There are many types of bond instruments that investors can purchase. Different types of bonds carry different risks depending on whether it is a foreign bond, mortgage backed security, municipal bond, or even CDs (Certificate of Deposits). It is good practice to work with a qualified CFP® (Certified Financial Planner) to gain a better understanding of bonds and their risk to your portfolio.
5 – How To Invest In Times Of High Inflation
Investing in a time of high inflation is very similar to investing in a time of low inflation. The key difference is that in times of high inflation, your returns are potentially higher.
The danger of individual stock investing
When you invest in a fund that contains all the stocks in an entire asset class or index rather than the individual stock itself, you’re diversifying your risk by spreading it across many different stocks. The reason that individual stock investing is so risky is that market risk can be considered temporary (there has never been a permanent loss in the total stock market). However, there can be permanent loss in an individual stock since many individual companies go out of business or become defunct. Think back to Enron or Lehman Brothers to remind yourself how individual stocks can be a risky investment since diversification is very limited by owning one stock.
Real estate investing and inflation risks
Real estate is an asset class that can be appropriate for your portfolios. Exposure to real estate can be in the form of a fund or ETF, a partnership, or personal commercial and residential holdings. Like any investment, inflation will impact real estate returns and must be weighed regarding how much exposure is appropriate in an overall investment and planning strategy. With the rise of real estate technology apps (Zillow, Trulia, Loopnet) and the current rise in real estate pricing, many investors are tempted to get narrowly focused and position on one asset class which can create too much risk. Again, diversification is key to a successful portfolio.
Inflation can also have an impact on real estate in the form of high material and labor cost in construction, energy needs, as well as other commodities associated with real estate.
What about crypto and inflation?
Cryptocurrencies are still in their infancy, and the space is evolving extremely rapidly. Bitcoin has remained the dominant force in the crypto market thus far, but there are newer coins on the block (pun intended) that could eventually overtake it. Many crypto advocates claim that crypto is a hedge during high inflation and volatile markets. Famous Wall Street trader reportedly bought Bitcoin as a hedge in 2020. As Mike Winters points out in his Next Gen Investing column (dated July 8, 2022), “[…] this has not been proven to be true, at least not yet. The value of the cryptocurrency market overall has plummeted alongside rising inflation, with bitcoin losing half of its value since January. As of Thursday July 14th, the price of bitcoin has fallen around 57% year to date according to yahoo finance.
Standard deviation is simply the deviation of price from its mean (average). As you can see below, there has been extreme volatility in the price of Bitcoin over the last 20 months. This can be seen below as the standard deviation of Bitcoin is around 77% vs. the VTI index that is around 15%.
Another issue with this “property” is that the technology behind it is very complicated and nuanced. Since this is still a highly speculative investment, the volatility and access to funds has been very concerning. This can be seen in the news as a large crypto dealer, Voyager, recently had some troubles of their own. According to CoinDesk, “On July 1, Voyager froze customer funds. Just days later, it filed for bankruptcy protection in New York.” This is just one example of the extreme caution and diligence that needs to be taken if you are considering investing in this “property.”
Conclusion
When planning for your financial future, it is imperative that you don’t feel like you’re making the decision in a vacuum. Inflation is something to take into account when setting your savings goals, especially because it can eat away at your money’s purchasing power. Sometimes that might not be a huge concern, but other times it could have a devastating impact on your finances. So, don’t let inflation dictate your financial security – but do consider it as part of your planning for the future. With our guidance we can help you navigate the inflation waters to determine the best course of action for you and your financial future.
If you have any questions about how inflation is affecting your plan, please feel free to reach out to us.
Have a great weekend!
Source: Ballentine Capital Advisors
Golf Tip of the Week
Remember These Chipping Fundamentals
Having good fundamentals in chipping is so beneficial to creating solid contact.
The two tendencies I see a lot of amateurs’ struggle with when chipping is using their hands too much and feeling like they need to lift the ball in the air. By creating some awareness in your chipping set up and motion, your chipping can drastically improve, thus lowering your scores.
At Address
- Stance should be square to slightly open to target
- Weight should be 70% on your front leg
- Hands should be slightly in front of the ball……arms and club form a lower case “y”
The Takeaway
- Rotation of swing on front leg axis……no weight shift in backswing
- Swing low to the ground in pendulum like motion
Impact
- Strive for same positions as at address
- Maintain wrist angle through shot
- Remember the loft of the golf club is what lifts the ball
Finish
- Hips and chest turn through the shot
- Hands finish higher than club head
- Club finishes at target
Tip adapted from golftipsmag.comi
Recipe of the Week
Hunky Chunky Guacamole
6 servings
Ingredients
- Flesh of 3 avocados, cut into chunks
- Juice of 1 lime
- Juice of 1 lemon
- 4 vine-ripened tomatoes, peeled, seeds removed, chopped
- 1 red onion, finely chopped
- 1 green chilli, seeds removed, finely chopped
- 1 garlic clove, crushed
Instructions
- Place all ingredients in a food processor and pulse to just combine. Don’t over-process, as you want the guacamole to be quite chunky.
- Enjoy with tortillas, chips, or pita
Recipe adapted from taste.com.auii
Health Tip of the Week
Fuel Your Fitness
Your heart needs exercise — and what you eat before, during and after physical activity can affect your performance and how you feel, says Johns Hopkins registered dietitian Kathleen Johnson, M.A., R.D., L.D.N.
To personalize what you eat around exercise, dietitians consider two main things, she says:
How much exercise?
Someone doing high-intensity interval training or weight training needs to eat more than, say, a beginning walker.
Your fitness goals.
Someone who wants to lose weight must be careful not to take in more calories than he or she is burning. “A 500-calorie smoothie after an hour of weight training is fine if you’re trying to build muscle, but not if you’re trying to lose weight,” Johnson says.
Working with a dietitian can help you customize your eating based on these factors. But some general guidance is smart for anyone who counts exercise as part of a heart-smart plan.
What to Eat Before Exercise?
“Hydration is really important,” Johnson says. She prefers coconut water or plain water to sports drinks, which contain more calories and sugar.
Eat only foods that are familiar to you. “Before a workout isn’t a great time to experiment with a new super smoothie, especially if you’re prone to gas and bloating,” she says.
Ideally, you want to plan your meals, so they are no more than an hour and a half to two hours before your workouts. However, if you need to eat closer to exercise than that, grab a small snack focusing on a complex carbohydrate and protein. Think peanut butter and banana, or yogurt with granola.
“If you work full-time and exercise in the evening, think about lunchtime-onward as your pre-workout eating time,” Johnson suggests. That will help you think through nutritious choices, rather than grabbing a quick bite of whatever’s handy.
What to Eat During Exercise?
Most people don’t need to eat anything while exercising, Johnson says, “unless you’re an endurance athlete doing a multi hour workout.” If you have poor blood sugar control, sipping coconut water can be useful — you’ll get a little sugar along with hydration and balanced electrolytes (necessary substances in your blood and body fluids that you lose through sweat).
What to Eat After Exercise?
After exercising, aim for balance. “Don’t overemphasize protein, fat or carbohydrates while neglecting the others,” Johnson says. Protein is especially important, but she advises eating whole foods (lentils, quinoa, fish, beans) over protein powder. Carbs are key too. They don’t have to be grains — fruits and vegetables are mostly carbohydrates. Healthy sources of fat include avocado, fish and olive oil.
Examples of well-balanced post-workout choices include olive oil (a healthy fat) drizzled over quinoa (protein) or trail mix containing nuts like almonds and walnuts, seeds such as pumpkin seeds, coconut flakes, and berries.
Tip adapted from hopkinsmedicine.orgiii
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Sources:
Photo by Yassine Khalfalli on Unsplash; Photo by CHUTTERSNAP on Unsplash; S&P 500 stock chart source:
https://www.officialdata.org/us/stocks
https://finance.yahoo.com/quote/BTC-USD?p=BTC-USD&.tsrc=fin-srch
Disclosure:
Ballentine Capital Advisors is a registered investment adviser. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.
Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.
This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.
No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.
Advisory services through Ballentine Capital Advisors, Inc.
i https://www.golftipsmag.com/instruction/short-game/remember-these-chipping-fundamentals/
iiwww.taste.com.au/recipes/hunky-chunky-guacamole/37b7398f-13ab-48c8-98b2-c2b15ff902aa?r=recipes/guacamolerecipes&c=rmq4ka7t/Guacamole%20recipes
iiihttps://www.hopkinsmedicine.org/health/wellness-and-prevention/fuel-your-fitness
