Author Topic: How do you prosper during inflation?  (Read 12246 times)

FlorenceMcGillicutty

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How do you prosper during inflation?
« on: June 02, 2013, 09:34:05 PM »
I really liked the MMM post: http://www.mrmoneymustache.com/2013/05/07/how-to-prosper-in-an-economic-boom/. I'm a sucker for general financial rules of thumb. Given that, what's are the best bets for inflation? It sounds like most economists expect it to be the next economic threat coming. Not sure if it's going to be anytime soon since we're still in recovery mode, but I think it's just a matter of time. I know low-interest debt is good during inflation, but I'd love to hear more ideas.

Paul der Krake

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Re: How do you prosper during inflation?
« Reply #1 on: June 02, 2013, 09:41:38 PM »
Getting good at taking care of, and repairing, anything. Being an astute observer of trends without getting sucked into the arms race.

Rural

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Re: How do you prosper during inflation?
« Reply #2 on: June 03, 2013, 04:15:01 AM »
Lern to want less and, better, to need less. Grow as much food as possible and otherwise minimize spending. Ditto on learning to repair things.

Actually, there's an old saying that pretty much has the instruction manual for inflation: use it up, wear it out, make it do, or do without.

Khan

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Re: How do you prosper during inflation?
« Reply #3 on: June 03, 2013, 04:24:41 AM »
I don't think either of the previous replies are good answers to what to do during a period of economic inflation, and I have no idea what the answer is, how investments perform, how people react during periods of heavy inflation(above what has been the norm for the last ~30 years).

Now, the second reply looks like a good reply for lifestyle inflation... I think....

Bigote

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Re: How do you prosper during inflation?
« Reply #4 on: June 03, 2013, 05:13:55 AM »
Having long term debt is an obvious way to prosper, since you get to pay it back with deflated dollars.  Having said that, it's not something I would recommend and I also disagree with your premise that most economists are expecting it
« Last Edit: June 03, 2013, 05:16:25 AM by Bigote »

workathomedad

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Re: How do you prosper during inflation?
« Reply #5 on: June 03, 2013, 05:43:00 AM »
Gold is often suggested, though note these percentages seem to be only 10-25% of portfolio, with 25% being for more extreme doom economists (like Marc Faber). If you listen to ZeroHedge you will think you should invest 101% and then take out large mortgages and buy Gold.

You can find more suggestions: https://www.google.com/search?client=safari&rls=en&q=things+to+buy+for+inflation&ie=UTF-8&oe=UTF-8
« Last Edit: June 03, 2013, 05:48:55 AM by workathomedad »

Kriegsspiel

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Re: How do you prosper during inflation?
« Reply #6 on: June 03, 2013, 05:48:26 AM »
Personally, I'll stick with my own re-balancing bands and not try to market time.

matchewed

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Re: How do you prosper during inflation?
« Reply #7 on: June 03, 2013, 05:54:37 AM »
I don't think either of the previous replies are good answers to what to do during a period of economic inflation, and I have no idea what the answer is, how investments perform, how people react during periods of heavy inflation(above what has been the norm for the last ~30 years).

Now, the second reply looks like a good reply for lifestyle inflation... I think....

Actually both replies you're referring to are good answers.

Fixing and repairing items costs less than buying new/used. When inflation drives the costs of goods up the price of your stuff goes up as well. So fixing and repairing reduces the impact inflation will have on you.

Just buying less will reduce the impact that inflation has on you because you're not buying items which are rising in price.

But that aside a home (or homes being a landlord is probably a good hedge too) with a fixed mortgage is probably one of the best hedges. And a home is such a large value asset it is probably enough. As usual run the numbers don't just go out buying a home because you fee/think inflation is on the way.

Ipodius

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Re: How do you prosper during inflation?
« Reply #8 on: June 03, 2013, 06:00:57 AM »
The greater the inflation rate, the better it is to purchase property you live in, and the better rental properties may look. You lock in your cost now, and inflation slowly undermines it. Of course you still need to do all your normal calculations, but it's something to keep in the back of your mind.

But overall, I would say the normal rules apply - live well below your means and be investing in income-producing assets with appropriate diversification and risk levels for your situation. Another thing that can make sense is having a smaller cash emergency fund - at some point, the hypothetical risk of having to sell some equities while the market is down (or take on some debt at a bad interest rate) becomes much less of a threat than the guaranteed deflation of cash in the bank.

FlorenceMcGillicutty

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Re: How do you prosper during inflation?
« Reply #9 on: June 03, 2013, 07:49:16 AM »
Thanks for all the thoughtful responses. I'm summarizing here but this is what I'm hearing for general "rules":

1. Low, fixed rate debt is a good hedge as long as you're diversified beyond that.
2. Live frugally, lower consumption
3. Rental properties could especially be good investments since rents go up during inflation but the mortgage debt loses value

Another one nobody mentioned is to invest in I bonds. I know a balanced portfolio would have them in there anyway, but they're a great protection too. I haven't invested in them yet but may in the future.

I'm actually kind of surprised that people aren't more concerned about this. If we hit another period like the 80s and have double digit inflation, it could really hurt retired folks. I know mustachians always have backup plans though :).

FlorenceMcGillicutty

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Re: How do you prosper during inflation?
« Reply #10 on: June 03, 2013, 07:50:58 AM »
Another question to clarify my first post--if/when inflation hits, where are the investment opportunities? Where's the upside to inflation?

matchewed

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Re: How do you prosper during inflation?
« Reply #11 on: June 03, 2013, 08:08:11 AM »
So you're more asking about hyperinflation rather than just regular ol' inflation (the 80's weren't that bad you're thinking the 70's)? The advice is pretty much the same. Fixed debt, investments tied to inflation rate, and a bit of self sufficiency.

Yes it is a big concern but other than what is stated there isn't much else you can do about it. The same goes for most economic curveballs which will happen in our lifetimes. You can only plan and prepare so much. Worrying about it beyond that is a silly exercise unless you enjoy worrying about lightning strikes or car accidents.

If you're a wage earner the upside to inflation can be your pay may increase with inflation (sometimes). It is good if you provide services which do not require much spending as you can raise your rates somewhat relative to inflation (you'll have to or your buying profitability goes away).

People often talk of inflation like it's this singular event. It is not, it is generally an ongoing thing and within the last 40 years or so a fairly steady thing (cross fingers/knock on wood/drive another nail into the voodoo doll that looks like Bernanke). The opportunities for a "regular" amount of inflation are no different than your opportunities today. Set up an investment plan and stick with it, revise as necessary.

I've attached a chart for US inflation over the last 100 years or so to illustrate the ongoing nature of it.

*Edit* to include source - http://www.tradingeconomics.com/united-states/inflation-cpi
« Last Edit: June 03, 2013, 08:22:27 AM by matchewed »

oldtoyota

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Re: How do you prosper during inflation?
« Reply #12 on: June 03, 2013, 08:14:44 AM »
I'd say go for bonds during inflation.

1. Mortgage debt as a hedge against future inflation
2. Bonds

If you keep your portfolio balanced, you should be take care of on #2 already.

A distant #3. Although it sounds strange, you could buy items now that you will need anyway and that will not go bad. For instance, you could buy trash bags and canned food and/or other items made with oil.


FlorenceMcGillicutty

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Re: How do you prosper during inflation?
« Reply #13 on: June 03, 2013, 08:17:00 AM »
Thanks Matchewed! Yes, I'm asking about inflation that would reach above historical averages. Super helpful response. I know how to prepare for average inflation. It's the hyper inflation I'm worried about. I guess just like anything else you diversify and go on autopilot. Thanks!

FlorenceMcGillicutty

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Re: How do you prosper during inflation?
« Reply #14 on: June 03, 2013, 08:18:17 AM »
I'd say go for bonds during inflation.

1. Mortgage debt as a hedge against future inflation
2. Bonds

If you keep your portfolio balanced, you should be take care of on #2 already.

A distant #3. Although it sounds strange, you could buy items now that you will need anyway and that will not go bad. For instance, you could buy trash bags and canned food and/or other items made with oil.

Good call. I'm going to put all my money in Forever stamps :)

oldtoyota

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Re: How do you prosper during inflation?
« Reply #15 on: June 03, 2013, 08:18:42 AM »
Thanks Matchewed! Yes, I'm asking about inflation that would reach above historical averages. Super helpful response. I know how to prepare for average inflation. It's the hyper inflation I'm worried about. I guess just like anything else you diversify and go on autopilot. Thanks!

That sounds good, and that is the Boglehead way. =-)

matchewed

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Re: How do you prosper during inflation?
« Reply #16 on: June 03, 2013, 08:20:54 AM »
Yeah I mean when people back test common investment strategies it is no guarantee it will succeed. But that back testing has gone through the bumps and dips in that graph quite successfully. It doesn't mean you or I won't fail. That is always a possibility but that is also life.

*Edit*

Furthermore the whole deal with "Mustachianism" and focusing on the Pareto principle to drive your highest cost items down (food, shelter, transportation) means you can handle inflation better than most, but solely relying on investments as income would make that hard. If you're still working it may not be too bad. Please don't take my optimism as inflation is not dangerous, it is, but beyond what has been outlined I'm not certain of ways to mitigate it.
« Last Edit: June 03, 2013, 08:25:49 AM by matchewed »

oldtoyota

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Re: How do you prosper during inflation?
« Reply #17 on: June 03, 2013, 08:23:25 AM »
I'd say go for bonds during inflation.

1. Mortgage debt as a hedge against future inflation
2. Bonds

If you keep your portfolio balanced, you should be take care of on #2 already.

A distant #3. Although it sounds strange, you could buy items now that you will need anyway and that will not go bad. For instance, you could buy trash bags and canned food and/or other items made with oil.

Good call. I'm going to put all my money in Forever stamps :)

Ha! =-)

I knew you would know about asset allocation, so I did not mention it. I've been looking into I bonds myself recently. I would like a place to put semi-liquid cash so I am educating myself as to the bond rules around early withdrawal. The gvt would take some interest if one withdraws early, and I would only withdraw early if it was an emergency.

To clarify, I want to get some cash into bonds now and let that clock start ticking. Then, I'll have another batch kept in a checking account for more immediate emergencies. Meanwhile, the batch in bonds would be earning at least a little bit more than the emergency $$ currently in a MMF.

When I saw that my Vanguard MMF is charging a .17 load with nearly no interest, I realized I needed to move my liquid money!


brewer12345

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Re: How do you prosper during inflation?
« Reply #18 on: June 03, 2013, 09:08:17 AM »
I mostly have chosen to hedge by having a 30 year fixed mortgage, avoiding a large position in bonds, and making sure I own some commodity producing equities.

workathomedad

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Re: How do you prosper during inflation?
« Reply #19 on: June 03, 2013, 12:16:00 PM »
Yikes!

Bonds are generally not recommended during inflationary scenarios. Bonds actually tend to lose value in inflationary scenarios - inflation meaning the value of the currency going down. The 30-year yield is only 3.26% and if you're expecting higher inflation (e.g. 5-10%) you'd be losing money. If the market believes in inflation the value of your bonds will go down - less people will want to purchase a depreciating asset. The stock market and something like commodity-based dividend paying stocks are often recommended for inflationary scenarios.

If you think deflation will occur instead (contraction in monetary supply & the value of that currency rising) then it is generally recommended to move out of stocks and more into bonds.

http://bonds.about.com/od/bonds101/a/The-Impact-Of-Inflation-On-Fixed-Income-Investments.htm
« Last Edit: June 03, 2013, 01:42:00 PM by workathomedad »

Kriegsspiel

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Re: How do you prosper during inflation?
« Reply #20 on: June 03, 2013, 04:04:35 PM »
I thought toyota was joking :D

huadpe

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Re: How do you prosper during inflation?
« Reply #21 on: June 03, 2013, 04:14:19 PM »
Keep in mind when talking about taking on debt as an inflation hedge: current interest rates have expected inflation built in already.  So you won't come out ahead if inflation proceeds as expected, only if it increases above what the people putting money on it expect.

Predicting inflation (or stock prices, or bond prices) is basically impossible.  If you know for sure what prices are going to be in the future, congratulations on your new found wealth, because you are about to be the richest person in the world.  Or enjoy the prison jumpsuit when the feds get you for insider trading.

If you own stocks, that's a pretty good inflation hedge, as the price of equities goes up with the real economy, all else being equal.  If you specifically want inflation protection, you can buy I-bonds or TIPS, but you'll under-perform the equities market over the very long term.

matchewed

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Re: How do you prosper during inflation?
« Reply #22 on: June 03, 2013, 04:49:51 PM »
Keep in mind when talking about taking on debt as an inflation hedge: current interest rates have expected inflation built in already.  So you won't come out ahead if inflation proceeds as expected, only if it increases above what the people putting money on it expect.

Predicting inflation (or stock prices, or bond prices) is basically impossible.  If you know for sure what prices are going to be in the future, congratulations on your new found wealth, because you are about to be the richest person in the world.  Or enjoy the prison jumpsuit when the feds get you for insider trading.

I believe it was mentioned for fixed debt and to lock in while inflation and interest rates are low if it is financially sound for one to do so.

sdp

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Re: How do you prosper during inflation?
« Reply #23 on: June 03, 2013, 05:49:22 PM »
I have actually been reducing my bond exposure down to zero in the last several years.  I am in the wealth accumulation phase of my liquid asset portfolio, and am still rather young.  Stocks have historically outperformed bonds for the longer time horizons that I am dealing with and I won't be tapping any of this money anytime soon.  Remember people, there are a whole bunch of different types of bonds and you should consider each different bond class for very different reasons- High yield, muni, I-bond, and TIPS are all VERY different vehicles, don't bunch them into the same or you will get burned one way or another.  If you already have more money than you know what to do with, don't need to be making any more, and your only concern is to preserve your purchasing power against inflation, then I can see TIPS being a useful vehicle for you, but if you are like me and still need your portfolio to appreciate above inflation, then your bond options are leaning towards the higher yield side of things.  I personally feel that those bond prices don't have anywhere to go but down in the present interest environment, so I don't see any upside potential, and as the interest rates start to eventually tick back up to the target the Feds will impose, bond prices will more than likely drop dramatically as a result.  No one knows when this will start to happen, but until I feel it is well underway I am reallocating away from bonds.  Bonds are a very useful element of an already established and well diversified portfolio and if you rebalanced religiously during the last recession, it would have increased your returns during the last six years quite a bit.  My situation is a little different in that I am in the accumulation phase and young and therefore stomached the volatility of the last recession easier than most, I took advantage of the recession by buying stocks on sale with new money from my income vs. reallocating money from other asset classes like bonds, like you would do with an already established portfolio.

sdp

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Re: How do you prosper during inflation?
« Reply #24 on: June 03, 2013, 05:56:52 PM »
In addition, unless you are veryy wealthy, your bond options will be restricted to mutual funds as opposed to buying the original coupon.  I personally feel that bond mutual funds are over sold at the moment and in the coming years we will see many baby boomer retirement funds begin to sell off their bond positions as they tap their retirement accounts for income.  As interest rates tick up and the value of their bonds begin to drop, they will sell off even quicker as they reallocate to safer interest bearing vehicles.  I feel that bond mutual funds are going to drop even more dramatically as interest rates rise due to the fact that with all the buying and redeeming of fund shares it forces the fund to hold less than 100% of their coupons to maturity.  but who knows.........

Mr Mark

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Re: How do you prosper during inflation?
« Reply #25 on: June 03, 2013, 07:11:37 PM »
Which is why it's best to avoid long term bonds at all costs.

Instead, inflation protection is offered by:
A core bond/stock ratio of 10/90 to 15/85 max, short to intermediate term bonds only
A hefy 20% - 25% foreign equity
A 30 year fixed rate mortgage, secured on rental property
As above, on your home
Low operating cash balances,
Commodity producing businesses
Productive land
Quality us equities, in businesses that can adjust to higher inflation, like http://www.valueinvestingworld.com/2009/06/warren-buffetts-comments-on-inflation.html

Warren Buffett describes. He notes how companies with real economic goodwill/brand value and high IP, low capital requirements, do better, plus
<quote>
Businesses that are particularly well adapted to an inflationary environment. Such favored business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital</quote>

And avoid gold fear mongering. It does not protect against inflation. Anything more than 5% is nonmustashian investing. I have almost zero, because any more than that is pure speculation.

Don't panic.


matchewed

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Re: How do you prosper during inflation?
« Reply #26 on: June 03, 2013, 08:05:57 PM »
And know where your towel is.

Mr Mark

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Re: How do you prosper during inflation?
« Reply #27 on: June 03, 2013, 08:25:34 PM »
And know where your towel is.

+1

You can never trust vogons.

http://en.m.wikipedia.org/wiki/Vogon

KMMK

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Re: How do you prosper during inflation?
« Reply #28 on: June 03, 2013, 08:30:11 PM »
If you can't see them, they can't see you.

sdp

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Re: How do you prosper during inflation?
« Reply #29 on: June 03, 2013, 09:18:15 PM »
are we talking about bonds or bondage?

workathomedad

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Re: How do you prosper during inflation?
« Reply #30 on: June 03, 2013, 09:26:14 PM »
You might find this helpful

Quote
Inflation occurs when the supply of money expands faster than the demand for money. When inflation happens, the value of units of currency decreases relative to things that might be bought with that currency, and so prices tend to increase. Central bank policy seems to favor a slow and steady inflation, and so inflation rates of 0-5% per year are commonplace. In PP terms, inflation refers to a severe inflation or hyperinflation, where prices rise unpredictably and very quickly, perhaps 10% or more per year. Inflation of that magnitude disrupts business and confuses the valuation of capital investments and securities.

Gold is an element whose physical properties make it well-suited to serve as money. It has been recognized as a store of value throughout nearly all of recorded history and among nearly all human cultures. It is a de facto, internationally-recognized form of money. Under a severe inflation, prices on all things rise, including gold. Due to rising prices, people seek to trade currency for hard assets; this tends to cause a mass exodus from currency into gold (among other things), which pushes the price of gold higher.

http://earlyretirementextreme.com/wiki/index.php?title=Permanent_Portfolio#Gold_and_inflation

Mr Mark

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Re: How do you prosper during inflation?
« Reply #31 on: June 03, 2013, 11:00:52 PM »
If you can't see them, they can't see you.

That didn't work, they destroyed the planet. Whether you kept you eyes open or not!


Ipodius

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