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Are Your Investments Beating Inflation?

The June inflation report was all bad news; here are some of the lowlights according to CNBC.

  • The consumer price index increased 9.1% from a year ago in June, above the 8.8% Dow Jones estimate.
  • Costs surged for gasoline, groceries, rent, and dental care.
  • Adjusted for inflation, workers’ hourly wages fell 1% during the month and are down 3.6% from a year ago.

The bad news is that workers’ wages are failing to keep pace with inflation, meaning paychecks are not going as far as they used to. If history is any indication, there may be more pain down the road. The last time inflation was this high was 40 years ago; it took two recessions before it got under control.

We know that wages are falling behind, but what about investments? How are the most common investments faring vs. inflation?

Stocks. The Fed’s arrow in the quiver for corralling inflation has historically been to raise interest rates. That’s been the case in this go-around with inflation as well, with the Fed having already raised interest rates three times this year with more increases planned by the end of the year. The logic behind raising interest rates is to raise the cost of borrowing for businesses and consumers to curb spending, which should theoretically curb prices. With reduced business and consumer spending, stocks decline as companies see a hit to their bottom lines from reduced spending.

Stocks Trending in the opposite direction of inflation has certainly been the case this year as the Dow is down more than 14% year-to-date.

Crypto. This latest round of inflation has been the first test for crypto, and it’s been ugly. Crypto is down across the board year-to-date, with Bitcoin leading the freefall – shedding more than 56% since the beginning of the year.

Treasuries. The current 10-year treasury rate currently sits at 2.96%. When considering inflation, that’s an annual loss of 6.41%, slightly better than putting cash under the mattress.

CD’s / Money Market / High Yield Savings Accounts. Certificate of deposits (CD’s), money market accounts (MMA’s), and high yield savings accounts (HYSA’s) are popular fixed income options investors gravitate to for parking their capital in uncertain times. But do they make sense in a high inflation environment? Let’s take a look.

According to Nerdwallet, the best rate listed right now on a CD with a fixed 5-year term is 3.35%. The best rate listed for MMA’s is 1.10%. The best rate listed for HYSA’s is 1.52%. The problem with these accounts is the yields fail to keep pace with inflation. At current inflation rates, in the best scenario (the 5-year CD), your portfolio is eroding at a rate of 5.75% per year.

Annuities. Some of the best fixed-income annuity rates right now hover in the 4.5% range, but that doesn’t take into account administration fees of 1-3% annually, putting real rates at 1.5% to 3.5%. In the best-case scenario, the actual return of an annuity is -5.6% when considering inflation.

The investing landscape is not pretty in an inflationary environment, with most investment options failing to keep pace with inflation. With eroding real wages and the potential for job loss from an impending recession, what options do investors have for beating inflation? Look to the investing habits of savvy ultra-wealthy investors for a blueprint for busting inflation.

Secrets To Busting Inflation

The ideal asset generates cash flow that outpaces inflation while its underlying value also rises, giving investors a double-edged sword for combating inflation. Smart ultra-wealthy investors have long been allocating tangible assets to cash-flowing to counter inflation’s effects – particularly assets tied to essential goods and services.

Consumers will always need shelter, food, fuel and goods that thrive even in a downturn are ideal for combating inflation as these goods don’t lose demand even as prices surge. Witness the current year’s cost of rent and fuel that has kept pace or outpaced inflation without waning demand.

Inflation is a juggernaut destroying portfolios in its wake. However, not all portfolios suffer from inflation. In fact, with the right assets, your portfolio can even beat inflation and thrive.

How is your portfolio?

Do your investments beat inflation?

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