A good financial adviser will not ignore the fact that inflation is an unavoidable fact of the modern American economy and, as such, it behooves the investor to arrange his portfolio to reduce the severity of the backhand across the face it can deliver when you tally up the credits and debits at the end of the year. Consider this. The government admits to an annual inflation rate of about four percent though, since the official calculation excludes food and energy costs, the number might as well have been sent in by as a candy-gram from a lobotomized clown, a term which, strangely, makes us think of Ben Bernanke.
The trouble is this. The real inflation rate is probably closer to ten percent, and that’s still being conservative. So, no matter how good your stock investments did, the real effect of inflation just took ten percent off the top. Let’s say your portfolio showed a hefty 11 percent gain. Nice! You’re doing better than most stock investors. Unfortunately, you now need to realize that you have already given back ten percent of your return over the preceding twelve months. You’re really looking at a one percent profit. And did you factor in broker transaction costs and administrative fees? Sorry, it looks like you really lost money last year.
In steps your trusty financial adviser to suggest you you get into TIP’s, REIT’s, Commodity ETF’s, and money market funds to help offset the toll inflation takes. His thinking is right. You certainly DO need to take steps to reduce inflation’s bite. But what you DON’T need to do is dive right back into these Wall Street approved options.
The only asset that has demonstrated an ability to thrive in the face of robust inflation is real estate investments in the form of income producing property. Those stock market based solutions we mentioned in the preceding paragraph nibble around the edges of the problem but don’t essentially change the equation. If you want real world protection against the debilitating effect of inflation, which isn’t going to go away with the current group of clowns running things, the solution is to get a long term mortgage with a fixed rate of interest, tied to a piece of income producing property. We’ve said it before but it bears repeating. This type of real estate strategy is the best performing asset in history.
The Solomon Success Team
Flickr / Ben Cumming