Our family needs a new dryer as our current one is not working as well as it originally did. Both our washer and dryer have been running multiple times a day for as long as I can remember. This is to be expected with a family of five including boys who play sports and two dogs who love the outdoors. Holiday weekends used to offer the ability to purchase a major appliance “on sale” or at reduced prices. That’s not the case this year as I’ve found, what’s going on?
One of the things we know post pandemic is everything is taking longer to locate and restock on the shelves. Regardless of where consumers are shopping, in the store or online, delays are to be expected on many of the products we want to purchase. Our country (and others) who manufacture the stuff we want, hit the pause button last year on producing more goods as Covid 19 raced across the globe. Now that life is getting back to normal, it’s taking time to ramp up production to keep pace with growing demand. This covers everything from building supplies, automobiles, computer chips, and even dryers. Manufactures no longer need an incentive to get customers on their website or in the store. The results are increasing prices with few discounts available and more time necessary to locate that new dryer. Economists call this inflation; I like to refer to it simply as the “rising cost of life.”
This rising cost of life impacts our spending and savings decisions daily. Costs rise slowly, almost invisibly, unless we’re paying attention (which we often aren’t) and this leads to price changes going unnoticed. Only when we’re ready to make a purchase are we jolted by the reality of higher prices. You can search the price history of all sorts of “stuff” and compare that to prices ten and fifteen years ago (or longer). This may surprise you. Consider the cost of a stamp the past 48 years:
- 8 cents in 1973
- 22 cents in 1988
- 32 cents in 1995
- 55 cents in 2021
If we know costs will rise overtime, how may we best prepare our portfolio for this change? What investments offer the best hedge over long periods of time? To answer these questions, we need to accept the idea that life will be more expensive tomorrow than it is today. Selecting the right investments as part of the planning process may keep your wealth relevant.
Of course, before you invest, it’s always prudent to get your cash reserves in order first. This is not exciting but holding cash does have its benefits. Having the right cash set aside for summer vacation, summer camps for the kids, fall tuition, and home repairs make it possible to invest today. Not setting cash aside may lead you to overreact and perhaps liquidate your investments when cash is truly necessary. This hamster wheel of mistakes compounds overtime if not addressed from the start. Cash first, then investments.
Fixed income investing includes lending to companies or our government in exchange for a particular yield on the monies we part with. These yields may change based on a number of factors. Current yields on a 10-year Treasury bond are generating 1.62%, 30-year Treasury bonds currently generates a yield of 2.30%. Investing in fixed income at current yields one must also consider the impact the rising cost of life has on returns. Historically, these rising costs have averaged 3 percent a year. Given the low interest rate environment we continue to live in, the current yields offered by fixed income, it’s possible that these dollars may not keep pace with rising costs as life gets more expensive.
Here’s what Warren Buffett has to say on the matter, excerpts from his February 2021 annual shareholder letter. “And bonds are not the place to be these days. Fixed income investors worldwide-whether pension funds, insurance companies or retirees-face a bleak future”
The alternative to lending to companies or our government via fixed income is owning companies. Equities are defined by ownership in various companies of all sizes and location. This ownership may take several forms, stocks, mutual funds, or exchange traded funds. Owning diverse companies may allow you to participate in their price contractions and expansions overtime. Equity prices may rise over long periods of time when compared to fixed income. Why is that? Owning equities requires you to accept volatility in price and value.
The returns on equities do not arrive via a straight line. It’s not up, up, up. Last year we saw down, down, down, followed by up, up, up. Down, down, down will arrive again soon enough, no need to speculate or time the market as this cycle will continue to repeat itself. It doesn’t matter where in the cycle you are when you invest. It simply matters that you do invest and that you remain patient and have a pleasant temperament and outlook regardless of what is taking place at the moment. It’s important to update your financial plan annually and build trust in a relationship with a financial planner
Equity prices will contract and expand overtime. A large majority of these companies may also pay dividends to their shareholders. These dividends may be reinvested in your account to hedge rising costs. Equities may offer both price growth and dividends that may be applied to hedging rising costs through a three-decade retirement.
We have choices on where to invest today to address the rising costs of life. What do you choose for yours?
Examples are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed. Any investment involves potential loss of principal.
Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including loss of principal.