Put Your Cash in These Assets to Survive Market Mayhem
Dear Rich Lifer,
Earlier this week we shared five ways you can inflation-proof your portfolio.
While these timeless inflation busters like real estate and gold have worked well for investors throughout past inflationary periods, we’re concerned these might not be enough to protect you from what’s unfolding now.
Last week, investors experienced inflation shock when the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) for April increased faster than it has since September 2008.
While the Fed dismissed the sharp rise as “transitory” due to the pandemic, the question on a lot of people’s minds now is how quickly will the Fed respond to this change in inflation?
The Fed’s first move most likely will be to “taper,” or reduce the amount in bonds it’s been buying, to keep interest rates low during the pandemic.
But less money moving into the market would lower bond prices and raise yields, which could increase the cost of borrowing for home buyers.
Also, higher yields will erode current values of future cash flows, especially for tech stocks, bringing stock valuations down.
The one saving grace, if you want to call it that, is the disappointing April jobs report which could give them some pause. But most likely the next move will be to raise the benchmark lending rate, which might come sooner than you think.
Whatever comes first, we’re likely in for some significant market volatility. To hedge against what’s coming, we’ve added five more investments we think you should consider adding to your portfolio…
Real estate is still an important asset to hold when inflation rises. However, don’t limit yourself to residential real estate or rental properties.
Food is the third-largest category used to calculate the CPI. This means inflation is partially calculated based on the price of certain food commodities.
While most investors flock to corn, wheat, and soy during times of inflation, we think you should also consider investing in the soil these commodities are grown in.
What’s great about farmland is you get returns from your land appreciating after you sell and annual cash flow from the crops.
Even with record-high inflation in the 1970s, farmland kept pace. According to AgWeb, Farmland has a 70% correlation with the CPI, and a nearly 80% correlation with the Producer Price Index, which tracks the change in sale prices.
Instead of inflation dragging down your portfolio’s value, your farmland investment should bring it up.
Investing in debt may sound counterintuitive, but here’s why it’s a great way to hedge against rising prices.
The big problem with inflation is your monthly expenses go up! Because wages have stayed stagnant for the majority of low- to middle-class workers over the last thirty years, increasing expenses without additional income creates a lot of financial stress.
But what if you could lock in rates for some of your bigger monthly expenses? How much would that lengthen your dollar?
The truth is you can. Housing is one of the biggest monthly expenses American’s face, but if you can switch your mortgage to a 30-year fixed rate, assuming your mortgage is variable, you’ll essentially eliminate inflation on one of your biggest expenses.
The same strategy works for car payments. If the interest you pay on your car loan is variable, try to get a fixed rate now so you know what you’ll be paying every month, regardless of inflation.
Less talked about than real estate and commodities, fine art is another physical asset that often increases in value, outpacing inflation.
And with the rise of Non-Fungible Tokens (NFTs), art is as good a value store as ever right now. But how can the average person invest in a masterpiece like an original Van Gogh or Rembrandt?
Nowadays, you don’t have to be rich to invest in fine art. Through platforms like Masterworks, you can buy fractional shares of fine art. The premise is similar to crowdfunded real estate: you buy shares in verified fine art and earn a return when the art is sold.
Like any alternative investment though, fine art comes with its share of risk. If you’re looking for an asset class that’s outside of the norm and has the potential to beat inflation, this next one could be it.
Similar to silver and gold collectible coins, stamps boom in times of inflation. What sets collectible stamps apart from metal coins is their transportability.
You can easily collect a notebook full of the rarest stamps, worth millions, and fly across the world with your collection safely stowed in your luggage. The same can’t be said for a million dollars in gold or silver coins.
For this reason, stamps are considered flight capital and have been used to hedge against inflation for generations among the rich.
With everything going on with cryptocurrencies right now, we’d be remiss if we didn’t at least mention them. The truth is no one knows how well crypto will fare during hyperinflation. It’s only been around since 2009.
However, cryptocurrencies like Bitcoin and Ethereum have a few things going for them over government-backed fiat currencies. First, they’re decentralized, so the government can’t manipulate them by printing more money.
Second, cryptocurrency supply is mostly limited. For example, there are 21 million Bitcoins that can be mined. But every four years, new coin creation halves. In 2012, it dropped to 25 bitcoins every 10 minutes, then in 2016, it dropped to 12.5, and in 2020, it dropped to 6.25.
Even though supply is growing, it’s growing at a slower rate over time. This is good because it places upward pressure on the value of each coin.
The issue with crypto is its volatility compared to more traditional inflationary assets like gold. So, if you do invest in cryptocurrencies to hedge against inflation, treat them more as speculation and allocate funds accordingly.
To a richer life,
The Rich Life Roadmap Team