Without question, people worry about bad things happening to their money. The idea of losing money can cause considerable mental anguish.
Unfortunately, sometimes people may not be worrying about the right things. People will overestimate the risk of something rare but dramatic, and underestimate the risk of something common but boring.
It’s not unusual for people to worry about their mutual fund declining in value. And that’s fair. Market volatility is a risk. It’s just that market volatility is not the only risk you need to worry about.
It is less common to worry about maintaining your purchasing power through your retirement. Like many serious problems, inflation may not seem like a big deal. Until it is. It’s analogous to smoking cigarettes. No lone cigarette does much harm, but the accumulation can be lethal.
In other words, people may be terrified about going broke quickly, but they blissfully ignore the risk of going broke slowly.
Folks, going broke is going broke. It doesn’t really matter if you did it in a spectacular flame-out when your speculation imploded, or if you did it because you found yourself with a fixed income in a rising cost world. Running out of money is a bad deal regardless of how it happens.
Historically some people have turned to precious metals, such as gold, for inflation protection. More recently some people have suggested that cryptocurrencies or non-fungible tokens might be a solution. There is just one problem with these options. They don’t really work that well, if at all.
Gold and cryptocurrencies have something in common, and it’s a big part of why they can’t really provide much, if anything, for inflation protection.
They don’t earn any money.
These things don’t pay any interest, they don’t distribute any dividends, they can’t charge any rents. They just sit there, doing nothing, while you hope with fingers-crossed that later you can sell them for a price higher than you paid for them. Maybe that works, maybe it doesn’t.
So how do you protect your purchasing power in times of inflation? The most reliable answer is to own assets that produce something of value, especially if your fortunes are not terribly affected by rising input costs. We call this pricing power, which means having some control over what price you can sell your products.
Here’s an example. In the last federal budget there were some new tax measures that were introduced. The consensus is that these tax measures are unlikely to have much of an impact on the businesses being taxed because the businesses will just pass the rising costs on to their customers. That’s pricing power.
There are two asset classes that have a demonstrated history of providing inflation protection: owning great businesses and, to a lesser degree, owning real estate. These are the types of investments that can grow at the same rate as inflation, or even more.
If you own high quality investments purchased at attractive prices you can do very well over the long term. That’s how you beat the rising cost of living; have your investments grow faster than inflation.
This does not mean that every single option in these asset classes will automatically be a good investment, however. If you buy shares of a speculative company at hyped-up prices it may not be a good investment. If you buy a cash flow negative rental property it may not be a good investment.
But these are the types of asset classes that have historically been the most reliable to provide inflation protection, and if you don’t build inflation protection into your portfolio you run the risk of going broke slowly. Growing broke slowly is less dramatic than going broke quickly, but the end result is the same.
Be sure to speak to your investment professional about how to protect against the very real risks of inflation.
Brad Brain, CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.