It is clear that the Federal Reserve cannot be trusted to protect us from a surge in inflation and frightening bouts of financial instability (see part one of this series). Who will do it for you?
After running at less than 2% the previous decade, inflation in February soared to 7.9%, the highest since January 1982, with gas prices up 38% and food prices up almost 8%. For most of us, adjusting to this is a Do-It-Yourself endeavor.
In our daily lives we can cut back on restaurants, trade down to chicken from steak, put off new car purchases, and call off our vacations. For those of us in our 40s and younger, we can largely ignore the threats roiling the markets right now and stay the course: time is on our side.
DIY may be insufficient when you have a lot more to lose and when, for older investors, you have less time for your portfolio to recover. You earned it, now let an expert help you preserve it and invest it.
Getting sound, professional advice that you can trust is more important than ever before. This is, of course, me talking my own book: my firm, Prattes Wealth Partners in Newport Beach, Calif., handles investing for professional athletes, executives, and entrepreneurs.
But my point also has the benefit of being true. High-net-worth investors are besieged right now by the Russian invasion of Ukraine, the highest inflation rate in 40 years, soaring energy prices, and high levels of corporate and sovereign debt. All of which creates even more uncertainty than usual.
So, what’s an investor to do? In high inflationary periods, owning real estate can be a good option. Caveat: interest rates are rising, and property valuations are at bubble levels, thanks to the promiscuous policies of the Fed. It might be better to wait for a correction… or a crash.
Gold is another common hedge, whether the real thing (a pain to store, keep safe from theft, and convert into cash) or ETFs like GLD and PHYS. Then again, gold is now at $1,950 per ounce—and the inflation-adjusted high for gold was almost $2,500—back in 1980!
So, maybe skip gold, unless your age starts with a 6-handle or higher.
What about bonds? Their returns have trailed inflation for decades, but most portfolios hold them as a hedge because we always have. Some advisors like TIPS, Treasury Inflation Protected Bonds, whose rates rise with the Consumer Price Index.
Yet I would avoid TIPS altogether. Their total return is down 6% in six months, a sign that wary investors know the Fed’s rate hikes will make newly issued bonds more attractive than existing, lower-rate TIPS.
The younger you are (20s, 30s, 40s) the less you have to buy bonds at all. For other investors, swap your long-term bonds for shorter durations, and do it quickly. This is one of the few things in investing that ever should be done quickly; invest gradually and patiently rather than in sudden lurches into oversized bets.
Let’s say you get lucky: you are 25, you just landed a $5 million bonus for trading (or catching passes), and you want to it to work. Bad idea to plow it into stocks all at once.
Instead, you could park that cash in short-term bonds (less than two years), and save your ammo for buying opportunities elsewhere. Buying in only slowly, so you can dollar-cost-average at various price points along the way.
This way, if stock prices continue to head down, you are buying at ever lower prices and are better positioned for the rebound. And, always, eventually, stocks will rebound.
Growth stocks can stumble in inflationary times, thus the Russell Growth 1000 index is down 14% since the start of this year, and the S&P Growth 500 is down 8.5%. The tech-heavy Nasdaq is down 12% since Jan.1. A broader software stock ETF that I like, State Street’s Software & Services (XSW), is down 13% since the start of the year.
Two of the fabled FAANG stocks, Facebook and Netflix, are down 34% and 38%, respectively, while Amazon, Apple, and Google are down 5% to 7%. [As of Wedn, April 6, 2022.] Investors who are both young enough and bold enough might consider buying some of those Big Tech names at these lower prices—just do it slowly, with precision and patience.