Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

What should I do to fight inflation?

This question is on most of our minds right now, and a fear many of us have never faced. For about the last 30 years, we’ve enjoyed economic growth combined with very low rates of inflation. To have previously experienced a period of high inflation in your adult life, you would have to be about 60 years old. For some current context, the Consumer Price Index, which is used as a measure of inflation, was up +8.5% for the one-year period ending 3/31/2022. This is the largest 12-month advance since May 1981 (source: Bureau of Labor Statistics). That’s also more inflation than the United States experienced over the four years of 2017-2020 when the CPI advanced around +7.5% over the entire four years.

Our opinion is that the least complicated and most reliable way to fight inflation is to invest in the stocks of companies who are good at passing rising costs onto the consumer. If you own these companies, you can expect their earnings to grow and to offset inflation by either increased stock values or higher dividend payouts. Given much of the inflation we are all reading about has been in building supplies, we like using Home Depot (ticker: HD) as an example of an inflation-fighting stock. During the first quarter of 2022, Home Depot raised its dividend by 15%. Home Depot is just one example, but it is certainly not an anomaly. All the following companies also increased their dividends during the first quarter of 2022:

• Arthur J. Gallagher (ticker: AJG) raised its dividend by 6%

• BlackRock (ticker: BLK) raised its dividend by 18%

• Chevron (ticker: CVX) raised its dividend by 6%

• NextEra Energy (ticker: NEE) raised its dividend by 10%

• Prologis (ticker: PLD) raised its dividend by 25%

Notably, all the companies listed are in different industries. We make this point because we feel a diversified portfolio of dividend paying stocks is most effective in fighting inflation.

Shouldn’t I invest in commodities to hedge inflation?

As a starting point, we have always avoided commodity exposure in the portfolios of our clients who are looking for growth. We define “growth” as “becoming wealthier” which is only possible if your performance actually exceeds the rate of inflation. The basic problem with owning the commodity is you own the rate of inflation with no profit. If you own a share in the company selling the commodity, you own the rate of inflation plus a profit.

We recognize that many people wished they owned commodities during the last 12 months as prices have soared. For example, aluminum prices have risen over 40%. So, why not buy some commodities? Investors can’t simply buy and hold most commodities. If you buy a bushel of corn and store it in your garage in hopes of a big rally in corn prices next year, the corn will spoil or get eaten by animals. So, most investors are left with the option of investing in commodities through futures contracts. These contracts lock in the price you can buy or sell underlying commodities for at a future date. On the surface, this sounds fine, but in practice, you have entered a very complicated and unpredictable game, which we feel is best left to speculators, and not appropriate for investors. Google “roll yield” and/or “contango” and you will quickly find out how complex making money in commodities really is. A deep understanding of these two terms is a prerequisite to investing in futures contracts.

What about real estate?

The challenge in real estate is adequate diversification. Investment real estate has provided investors with low correlation to the stock market and inflation protection. We are seeing people try to fight inflation by buying a second single-family home as an investment. These homes may appreciate in value, however, when you purchase them, you have also purchased all the expenses associated with maintaining them: real estate taxes, utilities, etc. It is extremely hard to get properly compensated for all the cost and risk you are assuming. The type of real estate investment that’s been effective over time is a diversified portfolio of investment real estate, including multi-family rental properties, storage facilities, data centers, and office space.

Our bottom line:

Keep it simple! Invest in a portfolio of good businesses which have the power to pass rising costs onto the consumer. In the end, you won’t only be rewarded by fighting inflation, but you will also earn a profit and be wealthier. We mentioned earlier that aluminum prices were up over 40% in the last 12 months. If you owned stock in Alcoa, the world's eighth largest producer of aluminum, your stock price would be up about 90% during the same time period. Which would you prefer, to own the commodity or the business?

Did you know...

Important information on current topics

The IRS has a tax-withholding estimator tool!

Did you receive a large refund from your tax return or owe more than you planned? Check out the IRS Tax Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator). This tool helps you understand the amount of federal income tax you want your employer to withhold from your paycheck by providing guidance on how to complete your Form W-4.

A few facts about Series I Savings Bonds

Series I Savings Bonds have been receiving a lot of attention over the last few weeks. Here are a few important points to note:

• Maximum purchase per person per calendar year is $10,000 via electronic bonds and $5,000 via paper
• Paper bonds can only be purchased via an income tax refund
• Electronic bonds can only be purchased via TreasuryDirect.gov
• Minimum term of ownership: 1 year
• Interest-earning period: 30 years or until you cash them, whichever comes first
• Early redemption penalties: Before 5 years, forfeit interest from the previous 3 months; after 5 years, no penalty