Most recent CPI (consumer price index) numbers were reported last week at 7% year over year which is a historical 40 year high, leaving investors and retirees worried about the future of their finances.
The Federal Bureau of Labor Statistics calculates the CPI and publishes percent changes in prices of a set selection of consumer goods including food, power, automobiles, and travel. A little-known fact is that the Bureau has routinely changed the basket of goods used in their calculation over the years and that certain items (conveniently) like housing costs and asset prices are underreported in their calculation.
The true CPI might even be double of what is being reported according to some economists at over 14% based off the Bureau’s own basket of goods reported decades ago (Shadow Government Statistics – Home Page (shadowstats.com)).
In this period of such economic uncertainty, many investors have flocked to hard assets such as precious metals, real estate, and some have poured their money into non-inflationary digital assets such as cryptocurrency and NFTs. With the federal reserve pushing investors so much further out the risk curve than they are used to, what can the individual investor do to protect their lifetime earnings?
With the federal reserve pushing investors so much further out the risk curve than they are used to, what can the individual investor do to protect their lifetime earnings?
Invest in real assets
In a period where the fiat currency pricing of goods and services is rising at such an alarming rate, it benefits the investor to be on the correct side of the equation; namely, be on the side of the price increasers rather falling victim to them. By buying hard assets such as investment real estate or commodities, investors have a higher probability of being able to issue rent increases, or at least have the value of their assets rise with the tide of increasing inflation.
In hyperinflationary times, debt can also be an asset
An additional benefit of investing in investment real estate is the ability to lock in 30-year fixed rate debt that will be eaten away by additional inflation down the road. Assuming banks stay true to their contracts, this fixed rate mortgage debt is almost a 2-for-1 inflation hedge if you as an investor still have trust in the value of the US housing market in the long term. (Check out our article on our opinion on the state of the US housing market). Obviously stay responsible with the type of debt you take on. Margin debt, or anything that can be called in the short term is inherently risky with increasing market volatility. Investors should only take on debt that they can reasonably service in the current time.
Earn More
As compensation discussions make their annual or semi-annual reoccurrence at the workplace, it is important to consider CPI increases as you head into these meetings. To bluntly simplify a very complex economic issue: if you are not making at least 7% more than you were making at this time last year, you are effectively getting a pay cut.
If you are not making at least 7% more than you were making at this time last year, you are effectively getting a pay cut
You must also remember that the income tax brackets haven’t changed despite inflation adjusted increases in wages, so as employers push wages higher to compensate for inflation; the individual is stuck paying the federal tax bill at the end of each year. In short: inflation is going to cause higher taxes, with less purchasing power for the individual.
Inflation is going to cause higher taxes, with less purchasing power for the individual
Don’t be afraid to ask for that pay bump or start looking for a new job. And if you’re an employer, consider frontrunning employee wage increases to keep top talent.
Summary
Generally, the investment advice given by the investing greats and standard CFP investing types is to diversify your assets. In this particular case I agree – just make sure you are looking at each asset class available to you and include certain assets that you may have overlooked including cryptocurrency and real assets. The federal reserve and central bank policies enacted worldwide have changed the way equity valuations, foreign exchange markets, and savings have been traditionally viewed in the past.
Many investors are now stuck in the position of investing in overheated markets or risk the guaranteed short-term loss of purchasing power by staying in the dollar. With so much uncertainty, staying diversified and owning some of each asset class might just cover your ass(ets)
Conclusion
- Diversify your portfolios – consider asset classes you may not have considered owning in the past such as cryptocurrency and investment real estate once you’ve done your own research
- Employees should expect pay increases to compensate for the loss in purchasing power/ increase in taxes or switch jobs to attain it
- Employers should focus on boosting morale and retention measures, and/or frontrunning wage increases to avoid turnover of top talent
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This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Booked Financial LLC recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager. Depending on the nature of your business there are different variables that would make one option better than the other. Please understand these before choosing to deduct expenses under actual or standard mileage on your tax returns.
The content of this post is provided as educational information only and is not intended to provide investment or other advice. This material is not to be construed as a recommendation or solicitation to buy or sell any security, financial product, instrument, or to participate in any particular trading strategy.
This blog post was prepared by Dustin Wong in my own personal capacity. The opinions expressed in this video are my own and do not reflect the view of Booked Financial LLC.