Inflation, Gyration in Equity Allocation? 8/2/22

Hello NFC Clients and Friends,

When was the last time you can remember going a week, or even a day, without seeing or hearing the word INFLATION? I’ll bet it wasn’t in the year 2022. For the previous decade we peacefully passed the time fretting over how long the earworm “Gangnam Style” would persist, avoiding the #IceBucketChallenge, debating the color of a dress that no one I know actually wore, and using fidget spinners to get us through the Sturm und Drang of the Kardashian family odyssey. Not once do I remember reading a piece about how to cope with INFLATION, or who to blame for the fact that the goods and services we buy today are almost 10% more expensive than a year ago. But here we are.

Part of developing a program for financial fitness is understanding that inflation has always been there, slowly but surely eroding our purchasing power. To make this point, I love showing my students a paycheck from my first year teaching.* That’s right, I was raking in $1,862.50 before taxes and de- ductions. We then have some fun with inflation calculators just to see the relative cost of goods and services over time. The key take-away: life will cost more in the future than it does now. So the question is: What do we do about it? This is where the old adage “if you cannot beat them, join them” comes to mind.

The world’s best hedge against inflation is NOT gold, commodities, real estate, or, heaven help us, crypto. It IS to own the companies that are raising the prices thereby participating in their increased revenue and profit. Owning equities (stocks) for the long run necessarily beats inflation, #Math. And the best, cheapest way to do this is to own them all through low cost index funds or ETFs (e.g. VTSAX or VTI, respectively). My complimentary gift to all NFC clients (either The SImple Path to Wealth or The Little Book of Common Sense Investing) does an excellent job of explaining how. If you have not read either of these short books yet, consider making room on your summer reading list, and/or watch JL Collins in the clip above. This, then, is the answer to the inflation problem: participate and benefit from the capitalist system by being an owner of it in the most broadly diversified and lowest cost way possible. Resist the temptation for gyration and trust your equity allocation, especially when there is pronounced inflation.

Once your portfolio is grounded in this foundation, and automatic monthly contributions are established, paying for an $11 dollar half-caf latte con carne in 2045 will not be a problem for you because $5 dollars invested this year will be worth $31 when you park your hoverboard at the local Starbucks. Let’s just hope this isn’t playing in your Apple Air-Plants™ as you wait.

Yours in education and financial fitness,

David

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