This is the ninth installment in an ongoing series where Marc Bautis, Wealth Manager and Founder of Bautis Financial, comments on hot topics in the financial industry. Today, Marc is joined by Kayla Waller, Bautis Financial’s Paraplanner.
What Asset to Invest in for Inflation
The markets had a hiccup earlier this week due to some negative news about COVID-19 variants. While the virus seems like it’s not going away anytime soon, I think the more long-term concern with the markets is inflation.
There are two kinds of inflation.
- One results from demand growing faster than the economy’s productive capacity, causing the economy to overheat. You can look at that type as good inflation, because it is usually linked to a stronger economy.
- Bad inflation results from constricted supply which curtails output, driving up prices and eroding incomes, leading to a weaker economy.
Much of the current debate over inflation is whether we’re experiencing the good or bad type, the latter being a bigger risk. The government has been steadfast in saying that the inflation we’re seeing is temporary, and prices will soon return to normal. This seems to be playing out with some of the materials like lumber, which has seen a recent price decrease. But the government has to walk a fine line with their inflation narrative.
For years, one of the reasons the feds said they were keeping interest rates low was because there was no inflation. If they say that inflation is permanent, there will start to be pressure to increase rates, which our economy probably can’t handle right now.
Inflation projections have been already priced into a lot of the typical inflation hedges like gold, TIPS and real estate. Back in 2009, Warren Buffet said that the best thing someone can do to protect against inflation is to sharpen their skills and work to be at the top of their field. He said, “if you’re the best teacher, if you’re the best surgeon, if you’re the best lawyer, you will get your share of the national economic pie regardless of the value of whatever the currency may be.” I’m not sure if teachers are the best example, since they are usually on pay scales, but I think we forget how valuable the ability to earn income is. Investing in yourself will always be worth it.
While investing in your ability to earn income is important, so is protecting your ability to earn income. Picture what would happen to your family finances if your income went away.
Life and Disability insurance are two ways to protect your income from something catastrophic happening.
A farmer had a Goose that laid Golden Eggs and went to talk to an insurance agent about insuring it. His question to the agent was a simple one: “If you had a Goose that laid Golden Eggs, would you carry more insurance on the Goose or more insurance on the Eggs? The agent thought, … well the eggs are valuable and should be appraised … the Goose is more valuable, because it laid the eggs and would possibly lay more eggs. The agent said you should probably carry the most insurance on the Goose, especially if it lives another 30 years and lays another 100 eggs!
Houses, cars and jewelry are golden eggs, and you are the goose that laid those eggs. Most people wouldn’t think about not insuring their eggs, however they often forget to insure the goose which produced those eggs.
Not All Investments Have the Same Risk
We’re all familiar with the periodic table of elements from our high school chemistry class. Riskalyze, a risk analysis software tool we use, published their own period table of asset class risk. The table shows a matrix of eight different asset classes and the associated risk number (on a scale of 1-100) of each. The asset classes are listed left to right in terms of liquidity; how easy you would be able to sell your investment if you wanted to.
A couple of things to note from the table:
- There’s been a lot of focus on potential interest rate increases to combat inflation, but on a whole, there is less risk in fixed income than there is in almost every other asset class.
- You could drill down even another level. For example, within equity funds you could have things like emerging markets where you take on additional risk, such as geopolitical or currency risk. What we are seeing in China with Didi is a good example of this.
- Small cap stocks are another subclass within the common shares equity class. There is typically more risk in small cap stocks, but over time they have been a better performer than the more well known large caps. It’s easier to double a company’s revenue from $100 million to $200 million — which would thus theoretically double the stock price — than it is for a $100 billion company to double.
- It’s not surprising that Bitcoin has a risk score of 99. If you look at a 2021 YTD chart of its price, it looks like a bell curve — which you don’t see too often in stocks. It started the year at $30,000, went over $60,000 in April and is now back down to $30,000.
Another Invitation to Refinance
There’ve been many interest rate drops over the last 10 years, where it’s made sense to refinance. Rates have pulled back recently, after a steady increase late last year into this year on inflation fears. If you are one of the few who hasn’t refinanced, you may have another shot.
The government announced that they are waiving some of the fees they have been charging on refinances. While this is something they should have done five years ago — at the height of the refinance boom — it could be the deciding factor of whether a refinance makes sense.
Potentially Larger Social Security Cost-of-Living Raise Next Year?
Commentary by Kayla Waller.
Recent inflation data may be causing social security recipients to worry about whether or not their monthly checks will be adjusted to reflect higher prices. Laws passed in 1973 allow for cost of living adjustments (COLA) to social security checks to keep pace with inflation.
The Social Security Administration adjusts its payments just once a year starting with December benefits that are paid in January. This means that recipients would have to wait until adjustments are made in December to see a new cost of living adjustment percentage hike that will be paid in January 2022.
The good news is that in 2022, recipients will likely see a larger COLA number than the current 1.3%. The bad news is that recipients have to deal with just the 1.3% increase for the rest of 2021 as inflation continues to threaten prices.
Is The Sky Actually Falling?
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