Inflation Never Stops
Key Take-aways:
1. Inflation operates continuously, similar to a “compounding machine,” and rarely produces negative numbers, with a recent example being in 2009.
2. A decrease in inflation rates does not imply a decrease in prices but rather a slower increase in prices compared to the previous year.
3. Physical assets like houses or gold are not practical hedges against inflation due to their lack of liquidity and difficulty in converting them to cash for everyday expenses.
4. To combat inflation, especially in retirement, it’s important to have a balance between safe investments and growth investments, like stocks, that can outpace or keep up with inflation and can be quickly converted into cash.
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Inflation Never Stops – Transcript
In episode 374, we’re going to talk about the compounding machine that’s always working against you.
Inflation is a non-stop machine. I think in “Jaws” they used to call it “an eating machine.” And sharks have to keep swimming, or they die.
Inflation kind of works the same way.
Inflation works 24 hours per day, 7 days a week, 365 days a year. Inflation never stops.
There are only a few years — in the last hundred years — where we saw inflation actually produce a negative number.
2009 was the most recent one, where we saw inflation actually go down.
There are years where the inflation is “less” compared to the year before. We’re going to talk about that.
See the Federal Reserve usually refers to this “basket of goods,” I’m not really sure what’s in the basket anymore.
But they will refer to this basket of goods that last year cost $100. And if we have a year with 5% inflation, well that basket that cost $100 last year, now costs $105 this year.
So let’s say in the next twelve months, inflation — now at 5% — drops to 3%.
That sounds pretty good, doesn’t it?
When you do the math, you’re going to see that your “basket of goods” that started at $100 went to $105 — didn’t really go down. It just went up less. So it went to $108.15.
Do the math on this.
You’re going to see that when “inflation is down,” it just means that “prices are going up less.” They’re going up slower than they were the year before.
Prices hardly ever go down. And so you need something in your investments — on your balance sheet — that’s going to grow, outpace the rate of inflation.
What could that be?
Do you think it’s your house? Believe it or not we’ve had people come in here and tell us “well my house is my hedge against inflation.”
We’ve got bad news for you!
That’s NOT a hedge against inflation. Because it’s very hard for you to hack off part of your living room — or sell your gutters — and turn it into cash so you can buy groceries. It just doesn’t work that way.
Likewise people will tell you “well I have a small percentage of my investments in gold or precious metals” or some kind of commodities.
Hey it’s really hard to hack off a hunk of gold and take it down to ShopRite. I just don’t think they are set up to let you buy groceries that way.
It doesn’t work.
You need something liquid, that is going to grow over the long-term, that will outpace the rate of inflation. Or at least, keep up with the rate of inflation.
But inflation never stops.
What are we talking about?
We’re talking about growth investments that you can turn into cash pretty quickly.
We’re talking about stocks. Growth investments.
This is something that a lot of people still don’t understand.
One of the things we like to explain to people when they come in to meet with us is that they may be planning to retire — the one time — the ONLY time in their life.
We retire people, clients of ours, every day of the week. That’s our job.
We retire people all the time.
We’ve gone through this over and over and over.
One of the things we implore folks to pay attention to, is how much they have in “safer” investments, and how much they have in “growth” investments?
A lot of folks just say “Hey I can’t take the hit anymore!” I need to tone it down, I need to be in something safe.
We get it!
We understand that!
And so we want to make sure you have your reserve account out of harm’s way — not involved in the market, not in something that’s going to be volatile.
We also want to have the next one year, two years… We’ve had some folks where we’ve had 3 years of expenses locked away in something not subject to fluctuations in prices.
The remainder of the portfolio needs to be allocated in such a way that you’ve got a piece of your account, some of your investments, working to help offset the rate of inflation.
Inflation never stops. The rate changes every year.
It’s going to go higher some years. It’ll be less some years.
But it’s hardly ever negative.
And so you need to have something — especially if you’re retired, that’s going to help offset the increase in your fixed costs month after month after month.
That is why you work with an investment advisor and financial planner like Mullooly Asset Management.
