Inflation is coming!!
Inflation is coming !!! Run for the hills, sell! Sell! SELL!!
This week’s latest consumer price index (CPI) data from the United States showed Inflation sped up in April, as consumer prices leapt 4.2%, the fastest increase since 2008. Stock Markets dropped a few % points and all of sudden people are panic selling.
So what actually is inflation, and does it relate to kids birthday party balloons? 🙂 Inflation essentially means the price of of goods and services in an economy are going up, which has a very real effect on the money in your pocket – e.g. food costs increase, cost of electricity increases and so on. A small increase in inflation every year is actually a good thing, and is part of a well functioning economy – but once it starts accelerating above 3,4% and higher things can get nasty. Just look into what happned in Zimbabwe during the 2008-2009 hyperinflation crisis. You needed a trolley full of cash to buy a loaf of bread!No joke!
Inflation can also have an effect on your investment portfolio. Which is why there has been an avalanche of news headlines highlighting the impending inflation doom. So if you are a Millennial, as I am, should you worry if you have investments in the market?
First let’s start with why inflation is bad for stocks.
Higher inflation is usually looked on as a negative for stocks because it increases a company’s borrowing costs. Increases materials and labour that a company needs to run. And also reduces the standard of living due to all goods and services becoming more expensive, while wages may not increase at the same rate. But probably most importantly in a market with high inflation, it reduces expectations of earnings growth, i.e. ordinary people have less purchasing power or in other words they can buy less of the goods and services a company offers. This ultimately causes downward pressure on stock prices.
There are a host of recommended strategies out there to protect against rising inflation in order to protect your investment portfolio, these include:
- Investing in bonds (keeping a relatively short maturity)
- Buying Treasury Inflation Protected Securities (TIPS)
- Investing in natural resource producing companies that can take advantage of commodity price inflation and pass that through to you in the form of profits
- Purchasing real estate whether publicly traded securities or physical real estate
But here is why you shouldn’t care?
What am I doing as a Millennial?
The answer is, I am not changing my investment approach one bit. My investment time horizon should be 20-30 years at the very minimum. If you are the same, you should follow the tried and tested dollar-cost averaging approach and consistently invest in broad ETF’s and Indices such as Vanguards VTI, VOO or VEE. Essentially you should not change your approach, keep contributing to your portfolio every month consistently, ignore the market drops. Stick with broad ETF’s and not single stocks and you will be just fine.
Why? Because historically, stocks have averaged an annualized return of 10%. The truth is if your time horizon is long term, you should not care about short term fluctuations caused by higher inflation, cut out the emotion and definitely do not panic sell, if your investment drops 10 or even 20%. See it as an opportunity to buy more of that investment as a cheaper price. Like a January clothing sale, get them while they are cheap! History doesn’t lie, cycles come and go like the massive inflation run up in the 1960’s, but again if you didn’t sell even if you bought in at the very highest prices in the 1960’s before the sell off, you still would have grown your investment 20X over by now if you just held.
So be smart, be consistent, remove the emotion and don’t panic sell. In 20 years time you can thank me 🙂
Anyway, following the behaviour of the FED since the pandemic began – they will probably step in and take corrective action to bring inflation in line with their targets of 2-3% p.a.
I am personally not changing my approach, the bulk of my investments are concentrated in ETF’s, although I do own some Gold and REIT’s. As I want to have an even further diversified portfolio.