How to Protect Your Money from Inflation!

this one's for the trolls how to protect yourself from inflation it's brian preston the money guy brian i feel like uh you if you are alive today and out there in the financial world whether it's just checking your facebook or reading articles or whatever inflation seems to be like this hot topic that everyone wants to talk about and so if it's something so prevalent so popular perhaps it's something that we should weigh in on no doubt and you didn't no comment on trolls i mean i wasn't talking about justin timberlake and andrew anna kendrick i mean i'm talking about the fact that on our youtube channel we love to share the the great news that 88 times over meaning you start young enough you start investing you can build millions that's right with just a little bit today for that great big beautiful tomorrow but it doesn't take long and it totally interconnects with this topic today for a troll to crawl out from underneath the bridge and go gosh i understand that that million dollars that you guys are so excited about will be worth 30 cents in 30 years and i'm like no you know so but i'm going to actually give a little attention to the trolls we're going to talk about inflation today because that is the the concern you should always have is is the value of my money going to be the same purchasing power as it is today is it and hopefully it'll hold that way in the future and that's always a concern and we're going to share some techniques some things you should be paying attention to and thinking about to protect yourself but but normally whenever we share any sort of vocabulary we want to kind of give you a definition like sort of a webster's definition for this thing uh and frankly if you just go google inflation there's a lot of really complicated definitions so instead of getting the webster definition you're getting the bow and brian definition our definition of inflation is that it's generally the rate in which the price of goods and services rise it's the general increase in the prices of things over a time period this is the brown and bow definition after adjusting daniel's definition that's right that's exactly what it was that's exactly what it is but the bigger question a lot of people because first we're definitely in a period of concern sure because i have people in construction that are friends of mine bo who tell me if you look at cost of plywood plywood is typically under ten dollars a sheet it's well over thirty dollars a sheet right now steel costs have shot straight up and people are starting to get concerned what does this mean and i wanted to kind of cover why is inflation so scary to the public and what's going on yeah because a lot of people it's one of those things that you especially for i'm going to say young folks and and brian in this category i'm going to say folks that are under the age of like 40 or 45 maybe even under the age of 50 you hear a lot academically about inflation but frankly we just have not seen a lot of inflation in our lifetime where we're living right now or at least if we have the folks who did see it were much much younger at the time that they saw it if they're under that age 50. so it's this theoretical thing that a lot of us lose track of and actually being like a tangible thing that's worth being scared of so let's go back in time to when actually inflation was scary and and probably the most recent period where we had really hyper inflation the stuff that we're worried about is 1973 to 1982 and look at this this this blows my mind inflation averaged over this decade 8.8 per year that's pretty substantial when you think about some of the long-term averages on inflation we'll talk about in a second but if you talk about just specific goods the average price of a new car over that 10-year time period went from four thousand dollars to almost ten thousand a little over ninety nine hundred that was a 144 percent increase in the cost of a car over that decade so if you've recently bought a car or purchased a car i want you to think about how much you paid for it right now and think about man 10 years from now to buy that same card have to spend 144 percent more to buy the exact same car well ask yourself i mean think about pickup trucks i mean it wasn't it seems like three or four years ago you could buy pickup trucks for i don't know 30 000. now i see pickup trucks that are costing 50 60 70 000 i mean i think about how is it going to blow all of our mines if a honda accord that you can currently buy for thirty thousand dollars all of a sudden was now selling for seventy five thousand dollars hard to think about it's just like caboose i mean it's just that it's not just that karza this can extends to to housing and other things as well the average home price over this 10-year period from 1973 to 1982 went from 32 500 to 69 300 that's a 113 increase in price so again think about the house that you live in or the last house that you bought fast forward 10 years and think about that same house costing you 113 more than what you paid for it 130 more than what it's worth today that's pretty remarkable and then think about consumer goods because this is not those are the big ticket items sure but when we get into the household goods there's bit inflation can cause you a lot of havoc with that as well let's let's talk about some of the basics milk i mean look at this it went from a dollar 31 a gallon to 224 a gallon that's actually a 71 increase in price over that 10-year period bread went from 27 cents up to 60 cents that's a 122 increase in the cost of that good over that 10-year period and then gas went from 39 cents a gallon which really cheap up to a dollar 30. and that's a 233 percent increase so as you can see in a relatively short amount of time just 10 years the price of the goods that we use every single day the gallon of milk the bread the gas the thing like that it can get very very expensive very very quickly and you can imagine if you were someone who had one dollar ten years ago you have that same one dollar now you are recognizing it just does not go as far as it used to so you're worried about your purchasing power meaning you have the dollars in your pockets dollaring your bank accounts the investments you have you're worried they're just not gonna be able to keep up that is the big fear and then you might ask yourself well how bad can this actually get because you guys are saying the last hyperinflation was 1970 you know the early 70s all the way through 1982. we averaged about 8.8 per year that sounds pretty horrible i'm telling you guys there's an extra gear absolutely to this thing and we've seen this in countries that when the kind of the government's collapse is where you really see the support for the currencies fall apart and look at this in venezuela a roll of toilet paper and i know you guys who are out there listening on the podcast you can't see the visual but we have a picture of a fat stack of bills right next to a a stack of toilet paper and maybe pre-pandemic we are all filling this a little bit with how hard it was to get toilet paper but it still wasn't this big of a stack in 2018 and bo say that currency yeah so it's a bolivar i think is how you say that and to buy one roll of toilet paper in venezuela cost 2.6 million boulevards and that is equal to roughly 40 u.s cents 40 cents in u.s dollars inflation in 2018 was estimated in venezuela to be one million percent you got to hold the whole oh yeah the dr evil 1 million percent so that is what happens when it gets bad when it gets scary it can get really really bad and it can cause some super negative consequences when it comes to the viability of you being able to do something even as simple as go out and buy a roll of toilet paper so this is something we need to be prepared for don't don't don't let this just happen because here's what i'm worried about with inflation is that i'm worried inflation is not going to be something that we invite just in because i mean there's a lot of people and look maybe ought to save this we'll go ahead and answer the question because i want to get into this a little deeper dive but we've got a lot of stimulus spending going on right now the gov we just came through this pandemic the government is very concerned about making sure that people are able to feed their families that you can keep your house and so they're passing lots of legislation and they're printing lots of money to ensure that we can all make our way through this pandemic and then beyond have this economic recovery what i'm concerned about is this stimulus spending causing inflation and again you kind of think about common sense if there is a certain supply of money in circulation and the government starts printing money and adding more bills and more bills and more bills and more stimulus you would assume that man the value of our currency the value of the dollar is going to decrease does that mean that rampant inflation is on its way does that mean that rampant inflation is coming towards us so i you know here's where one of the ways i was inspired in addition to some conversations with some construction people i had i get my emails of other you know bloggers podcasters and so forth and one of the friends of our show is fritz over at the retirement manifesto and i saw he had a show i mean he did some notes on inflation and he had a great quote and here it was it was from morgan household and it said adjusted for impla inflation the two stimulus packages passed in the last nine months are roughly equal to what we spent fighting world war ii over two years so when you think if you kind of go back in history and think about world war ii spinning and what was required of the country to all come together and be able to fight the war effort to fund the war machine over that two-year period we have we have surpassed that in the last nine months of stimulus just trying to get us through this pandemic just trying to get us through sort of this coveted thing should be something that gives you a little bit of pause or at least makes you think huh is this something i ought to be paying attention to well it's definitely alarming and this is what i was kind of getting to is that i am nervous because with as much debt as we're running as a country i think from some policymakers they think that this is inflation in some forms is good because if you owe you know 26 trillion dollars back the best way to pay back 26 trillion dollars is to make it not seem like as big of a number so you inflate your currency so that paying it back is not that big of a deal so i'm worried there's this concern this thought hey we'll just inflate things and it will be okay so we think this is good and that's the type of inflation where you just you hear a knock on the door you open it up and you invite them in and and it all works out like this awesome plan that you have sure i don't think that's what's coming though what i'm more concerned about is there's no knock at the door this is going to be one of those things where we're hanging out and all of a sudden the door gets kicked in and this beast of a concern actually just rolls onto us and let us show you what we're talking about we actually have a a graph of historical inflation from 1914 to 2020 and there's a period of a lot of ekg volatility and then there's a period after in the the kind of mid 80s where inflation is dropping and then it just kind of hangs out at the bottom yeah i think it's really interesting at the at the turn of the century in the early 1900s it was a lot of wild volatility super high inflation super high deflation then it moderated through the 50s and six and then what we all think about in recent memory is the late 70s but really since the late 70s we've not seen excessive inflation as we've gone through the 80s 90s 2000s and 2010s since 2014 all the way through the end of 2020 inflation has averaged about 3.2 percent per year so even factoring in that wild ekg early on the average has been about 3.2 percent we all know that if there is an average of 3.2 percent and there was a lot of it early on and then it's moderate it's been moderated for a while if we're going to stay true to that average we would assume that moving forward will probably have some level of inflation greater than the average because again there's a natural reversion to the mean that takes place well that's definitely that's what i think in show prep meeting you you gave a big uh oh uh-oh because i mean if you look at the graphic i mean if we are reverting to the mean that means we're we're probably going to to go well above where we are now look you said something and i want to give you a chance to pontificate a little bit you said you you're you don't think that we're going back to like 15 20 inflation give give your prediction i know predictions are dangerous but we can't give your thoughts i could totally be wrong on this right but if we think about uh inflation by decade right so you can see that in the 40s it was 5.6 percent in the 50s it was low and then the 70s and 80s 7.1 average inflation in the 80s it was 5.6 average inflation and since then it sort of pared down right 1990s it was three and then 2.6 1.8 1.2 so we've been in this time when inflation has moderated right if we believe that reversion to the mean happens that means that we should be able to expect some level of increased inflation the in the future to get us back to that average 3.2 well what is different i think now versus what was present 30 40 50 years ago is there are a lot of hands in the pot right now there are a lot of central banks there are a lot of powers that be that want to have a hand on and control inflation and there's even some way that currency is managed that is different than it was 40 or 50 years ago my prediction is not that we're going to see rampant outsized inflation because i think there are enough factors at play that can kind of control it but i do think we probably probably are going to see elevated levels of inflation and if reversion to the mean holds it's probably going to last for a longer period of time than i think we've been historically used to well i think because we've just i think we've put a little shock and awe on how you need to be concerned about inflation but there is something that's under the surface that we all need to be aware of the government has every incentive currently all the world governments have every incentive currently to keep interest rates as low as possible and the primary driver of that is they have a ton of debt on their balance sheets and they know as soon as interest rates go up they have to guess what pay more interest right on all the debt and all the money they've printed so there is a lot of incentive to kind of keep this game going on as long as possible so i just want to make sure you're aware of this and because we've been hearing the drum beat of of runaway inflation since really 2008 when quantitative easing started i mean this is every year we have you know more pontification more analysts and saying guess what inflation will be here anytime now and then we make it another 12 months and guess what it doesn't happen yeah i think even not even you can even stretch it further than 12 months you think about 2008 if you were making decisions thinking oh inflation is coming and i'm going to make whatever decision it was to try to combat that starting in 2008 you have kind of been wrong in 2009 and 10 and 11 and 12 and and so on so while my whole estimation of what inflation could do while it could have it could be right it could also be very very wrong we don't know and we think when it comes to portfolio construction one of the things you have to come to grips with is we don't always know exactly what's going to happen so we think whenever there's uncertainty you want to spread your risk and plan for what could come and not bet on what you think might happen for sure so that's a great segue into now how do you protect your assets from inflation let's get out ahead of this the first thing guys i mean it wouldn't be a money guy show if we didn't talk about this because it really is all-encompassing you got to go to moneyguy.com resources and and just download our nine steps to the financial order of operations because guess what guys the first thing you can do before you need to don't even consider getting defensive if you can just build this into your offensive plan meaning that you're going to build the concern for inflation right into your personal investment plan and i think that understanding how your money works where the next dollar goes can actually help you out with that process absolutely so as part of building your plan and as part of thinking about the things you ought to be thinking about we wanted to equip you uh with some things to keep an eye on some things to be aware of that you can sort of use as an indicator in terms of where inflation is is it present is it something i need to be concerning myself with now bo show prep you are so annoyed that daniel chose a bitcoin uh yep i think this we're going to share some of these and i think that some of them uh i agree with it i think something i disagree with so here's the thing we chose to use the terminology indicator to be aware of and to be careful of we did not necessarily say investing that's exactly right so these are all data points that i think you can use so i'm going to give bo a little respect on that because we'll get to bitcoin in a minute but let's first talk about like commodities yes it's a great one um commodities is you know by the way commodities covers a lot of stuff i mean we're talking about energy like traditionally oil and gas we're talking about materials like metals i talked about earlier i talked about lumber we talking about food because that's where you always hear the joke about pork bellies i mean there's all kind of things that fall into the commodity space and look this is a mixed bag in some ways and it can be a mixed bag but like i've already talked about lumber it looks like it's three times the cost gasoline you know meaning oil has bounced around a little bit as well you always just need to be aware because these it makes sense think about this from a common sense standpoint commodities are things that you're mining pulling out of the ground resources you're using if there is inflation they're gonna probably be the canary in the coal mine to let you know hey there's something awry here when prices start spiking so just pay attention to commodities precious metals yep that's another one you know the one that you most often hear about the one that we hear touted the most frequent is gold oh okay you want to use that as an indicator for inflation as we were talking in pre-show prep you know i do think gold is something to be aware of but i am of the opinion that precious metals specifically gold is more of an indicator of fear yeah of what's present in the marketplace i think the reason that people consider this a something to be aware of for an inflation hedge is because there's a limited quantity available now yes they're pulling a few percent out of the ground by mining it every year but the actual quantity of gold available is is restricted it's controlled you know by how fast you can pull it out of the ground so the fact that there if there is inflation it should reflect that because it's a precious metal now look there's other components of it and the fact that it does a fear gauge and other things like that but it's something you can definitely watch pay attention to pricing of gold it's not just gold also it could be silver which silver is even used in some of the manufacturing processes but just pay attention to precious metals once again i don't think it rises to the level that i consider this an investment though i don't i don't personally own any gold i guess i do own some gold and the fact that i inherited like some gold but i mean some but i don't really consider myself a gold investor and then the last one this is the one that bo and i actually came to fisticuffs in um pre-show planning was bitcoin um i'll i'll start off bo and the fact that you know i'm having this whole evolution because i've had time to sit around watch documentaries study bitcoin and specifically blockchain is getting me excited about some stuff because you know look we we hear every day where people are worried about free speech they're worried about government control they're worried about you know rising tides of other governments in other parts of the world that are even more restrictive and blockchain and bitcoin and the cryptocurrencies look like just like the internet was a breath of fresh air for opening up information to everybody there's a lot of people are saying that these forces in the background that are threatening individual freedoms will the salvation of that will come from probably blockchain technology because it's incorruptible in a lot of ways so people have attached that awesomeness to this is because it wasn't designed as kind of for the cryptocurrency to work in the financial space and bitcoin's been on a run by the way and i've even seen a lot of people i follow because we know there's only gonna be 21 million bitcoin we're getting we're over 18 million a lot of them were lost there's a limited supply and as the government's printing more and more money you're like this would be great as an inflation hedge now i gave you all a lot of love for all my crypto lovers now let me tell you the only thing that keeps giving me pause if you go take me on this journey to where we're going to turn um cryptocurrency specifically bitcoin into where it's now legit because we've got paypal we've got tesla we've got other big players who have stepped on the scene and said hey we're going to start dealing with some bitcoin the problem i have is that remember this thing is speculative because there's nothing driving the value other than you believing that somebody will pay more because it doesn't generate income it doesn't you know there's no innovation this thing is just a holder of value but there's nothing it's not like gold where you can actually hold it it's tangible this is definitely a it's kind of a digital gold but what does give me pause and why i do not personally have this as an inflation hedge is that with all those great things i said i'm troubled by the fact that there's like thousands of cryptocurrencies of things that are supposedly holding value that are gonna be the alternative for currency and then there's a lot of people that invent a new cryptocurrency it does well i'm not gonna throw names out it does well the founder or the people behind it when it reaches a billion dollars of market value they go cash in their chips they pull all the money out for their family and that makes me it sounds more like a pyramid scheme than it does an overall holder of value so that's the part i'm working on um but i do think that the limited supply the government's printing money there is something to that 20 million one million and i do think there's something to the fact that bitcoin is the biggest and boldest but it's i don't know if i can i'm not i'm not willing to call this an investment yet so i can appreciate the academia around the limited supply would suggest that it could be a nice inflationary hedge however i am also of the opinion that you have you kind of need a track record to know how something behaves and what it does what i like about using commodities or precious metals as an indicator is we've actually seen how those asset classes how those individual items have behaved in both inflationary times and deflationary times in different market environments and different contexts in my mind cryptocurrencies in bitcoin are just so so so new while theoretically they could serve as an inflation hedge we've not actually seen them exist in an inflationary time period so we don't know for sure i am not of the i'm still of the opinion that there are other factors at play that could affect the price or value of a cryptocurrency and what that cryptocurrency does that might lead you to believe it was inflation or deflation causing it but it's actually caused by something else so i am not quite ready yet to hang my hat on bitcoin being an indicator of inflation because we've never actually seen bitcoin during an inflationary environment well the value is it's too flippy flopping i mean this thing is so volatile that it's all over the place and that's why in maze and tool things stabilize and and i i mentioned this in pre-show planning we have not had the culling moment in this industry and the the cryptocurrency industry as a whole has not had its culling moment because you saw this with the internet too and i'm old enough that i remember when that went through and everything back then in the 90s also if you just strapped.com to it was worth a gazillion dollars we've seen that with like kodak remember when they announced one day that they were going to have some their own blockchain technology and their stock price even though they they have don't probably don't even have any patents that are carrying as much value as they were in their heyday just because they used the word cryptocurrency or blockchain in their their company it shot up that reminded me very much of the 90s i do think that the thousands will be honed down and cold down to just a few and it will be exciting it will be something that that we all should you know that will add value to our lives and if i'm a young person looking at careers looking at things that i could pay attention to to figure out those opportunities definitely keep your eye on what's going on with blockchain but with that said it's not an investment yet this thing is very speculative it's too volatile just keep your eye on it i think that um you know you got to be careful get being first in on things yes you might make a gazillion dollars but yes you might lose a lot too so what i love brian is we've kind of talked you through okay here's some things to look at here are some things to keep an eye on but by the way these aren't exactly things that could protect you there's something to be aware of so look at pay attention to them why don't we shift now and talk about if you are worried about inflation and if you do think that that's something that could be an issue for you or your portfolio moving forward what are some of the things that you could use to protect you what are some of the hedges that could be in place to protect you in the event that we did see inflation so these are what we would call investable inflation heads that's exactly right so the first one you guys are going to like this one too is we threw in real estate this is probably i call the lowest lying fruit is because this is one of the key benefits to real estate is that you know we obviously know there's a limited supply there's not making more unless you live next to a volcano and that's probably a pretty scary place to get more real estate made next to you but real estate does go up with inflation and owning a home is a great way to protect yourself um but i think there's even easier ways we like to talk about reits i mean you could not look you can own rental property you can do commercial property but if you just want the easy way i mean you can just do reits and we even have some research to show you what does that look like from a historical standpoint yeah we went and looked at the investment returns of real estate relative to inflation from 1972 you know pre-hyperinflation all the way through the end of 2020. what's interesting this shows uh every year if you're out there on itunes on heart rate you actually have a graph that shows every year annualized what the return was on real estate and then what inflation measured that year so from 1972 all the way through 220 inflation averaged about 3.9 percent per year that's the average rate of inflation we saw over that roughly what 50-year time period real estate on the other hand actually had returns of 9.2 annually so the price of goods rose by about four percent however if you were invested in real estate the value of your dollar actually rose by about nine percent when you look at this this visual that we've created here and for those out there in podcast world listening to it this thing looks like an ekg sure with the real estate doing way above inflation in years and then there's about five years over this 50-year period that that actually real estate just took a nosedive sure it was very volatile those are those down markets that you see with real estate from time to time so a lot of you looking at this visual be confused you'll be like is this actually good because based upon this it looks like that inflation is much more stable whereas real estate is all over the place and that's by the way that's like any investing we always talk about the walk up the mountain with the yoyo every year that you're in a diversified investor you will have some form of volatility but your goal is to capture enough good years because there's definitely remember eighty percent of the time you're going to make money eight out of ten years two years is typically out of every decade there's going to be down years this kind of fits to the t if you think about that you know we've got five where we went below zero approximately a 50 year period this is even better than average of one out of every 10 years but if you bring it and it's actually stacking what you get to keep each year above and beyond the separation is huge yeah so what you can see is the the value of a dollar invested or the value of a dollar eroded by inflation it's really interesting so if you had a dollar in 1972 over the course of the 50-year period it's gonna lose about four percent of purchasing power per year however your investment in real estate gains about nine percent per year so what you get to keep in terms of real purchasing power is the differential so the value of your dollar even with inflation happening increases about five percent per year by utilizing real estate as an investment but i think this is a great life lesson too on it's okay to have some risk on assets that will outperform inflation because you get rewarded for that in the long term the separation from 1972 through 2020 between inflation and what real estate has done is substantial when you look at it from a visual standpoint so we think that that kind of is the aha moment real estate will be something that can serve you well if you're concerned reits are the easiest way to get in you can do it through etfs you can do it through a vanguard a fidelity sure great way to play it another one and this is this is interesting to me is that the government has get gotten in on this too they said realize we we sell a lot of treasuries but i know we have people out there that are concerned because bond investing struggles when you're worried about rising interest rates so the government got creative and they said well you know what what if we create a government bond a treasury that actually adjusts for inflation and they created these inflation protected securities i'm going to defer to our in-house cfa and let him kind of walk you through his thoughts and how to even consider dealing with tips and eye bonds and all the other things yeah so essentially what happens when you have a treasury inflation-protected security is the government says all right we're going to issue a bond and we're going to pay you a stated rate of interest but periodically we're actually going to adjust the principal value of that bond based on what inflation is doing so if i have a thousand dollar bond outstanding and it's going to pay 3 percent in interest i'm going to get that 3 percent coupon payment every year what they're going to do though is as inflation increases they're going to inju adjust the principal value bond so instead of it being a thousand dollar bond it might go to an 1100 bond so when i get my 3 coupon it's actually based on the eleven hundred dollars instead of the thousand dollars so the theory behind tips is is that as interest rates rise as inflation rises i don't have to worry about my fixed coupon being stuck at a two or three percent because my principal value will be adjusted it's basically a normal bond with a little bit of juice on top of it to keep you protected so i know we're going to have a lot of our financial mutants that are clients that are going to be reaching out and saying hey brian you guys talked about this whole show with inflation um do i have tips do i have a bonds and and this is what we we know we know that we have hired very good fixed income managers and we've they have held these securities in the past and we're kind of trusting that's where we're putting because bonds are going to be a tough area to navigate that's why look we love index investing but we do think that fixed income is one of those areas where you have to pay attention because the landscape is ever evolving and changing and tips are not a walk through the park completely because look we're on a lot of government juice right now sure the government i even asked the question earlier in the show is stimulus spending causing inflation we've seen periods historically where because these tips aren't having not been around for that long and we've seen periods though with like quantitative easing in 2013 they were cutting it back and tips got crushed by about eight percent they lost eight percent of principle because we were bringing back some of that government juice that was being given to the markets and these these funds act these these holdings actually got hurt so i tell you that just because i know there's gonna be a lot of people curious are we buying a lot of tips right now are we buying eye bonds and that's the part where like i said we're counting on some of the management we're counting on we're watching the market and then bo this is something you said something really key tips are something you have to be careful trying to get in on the front end of it might be one of those things where you wait to actually confirm you have an inflationary period and then jump into the dance with these type of holes yeah i think what's really interesting is we already said that since the very first quantitative easing back in 2008 we were saying hey we got we need to worry about inflation we need to worry about inflation if you're someone that said oh you know what that's right that makes sense i am going to be worried about inflation i'm going to sell my entire portfolio i'm going to go buy inflation protected security starting in 2008. well what you would have seen is a decade that followed that was not a substantial inflationary period so trying to time it and trying to get out in front of it may not be the best bet and we all know that fixed income is actually way more of a complicated esoteric asset class than traditional stocks or traditional equities so we try not to over complicate it we try not to uh over guess on what's going to happen because a lot of it just like you said can be based on sentiment we decide that the government's going to stop buying bonds and quantity quantitative easing is going to go away inflation protected securities got hammered not because something had fundamentally shifted because there was a worry that something would fundamentally shift so you have to make sure you're aware of that and when we do portfolio design this is why we like diversification this is why we like to balance index funds with active managers so that you have that exposure but you don't you're not concerned about being a hundred percent right you want to protect yourself from being a hundred percent wrong and we even have some so we have the data on because these funds have been around a little over 20 years so we've seen how are they performing compared to inflation and you can see they've outperformed they've done better they've done expect exactly what they're they were supposed to now we asked an additional question we're like we'll compare this to the ag you know the basic bond index and we did find that you know during periods where quantitative easing from 2008 to really 2013 you'd have been very happy with your tips but then it seems like from 2013 to now 2021 you'd be much happier that you were actually in like a traditional ag type fun or an active manager that's doing your fixed income so it's but all these they don't by the way the spread is not so crazy that you feel like you know it's not the difference between man i wish i'd have bought that tesla stock i mean we're talking about just a few um points of spread here on the annual but it is something to be aware of yes they're viable tools to use in inflation but it might not be something that you want to use as a precursor to inflation so just be mindful of that and that leads us to our last investable tool or hedge for inflation and this is one i consider just like real estate no-brainer i consider this one a no-brainer but this one is one that for some reason it's not on the tip of the tongue of most people when we talk about inflation hedges but it definitely is for me and that's just your your equity holdings your stock portfolio because i've told you guys i get so excited about the world we live in and the fact that innovation is ever expanding and increasing it's not slowing down so when somebody tells you hey does this economic growth keep going i'm like ask yourself is innovation increasing or is it decreasing and then i remind people because this is probably the third show i brought it up pandemic hit our shores here in america in march of 2020 exactly one year in the future we have three vaccines to battle this that is innovation working in the medical space there is innovation going in the our pockets with our smartphones there's innovation all around us with the vehicles we drive this is not going to slow down so why in the world would you not want to be a part of that even if we get into an inflationary period yeah and i think what's amazing is that when you break it down to sort of its basis level what is owning an equity what is owning a stock it's actually owning a business when you go out there and buy a home depot or an apple or a tesla you along with that ceo are co-owners in that business well i've heard warren buffett give this example before a beautiful thing about if coca-cola wants to sell a coca-cola for one dollar and inflation happens and the price of the inputs the sugar and the i don't know anything else it goes in coca-cola besides sugar but the price of america's corn syrup that goes all in there right all those prices go what's coca-cola do they're going to raise the price of that good and they're going to charge a consumer more for that good well if you're an owner who gets to participate in that price increase you are naturally going to be inoculated from the rising prices from inflation so one of the best places you can be is on the ownership side of the equation well when you invest in the equity markets when you are a stock investor when you buy mutual funds and you buy etfs when you buy index funds you're actually buying ownership in those companies and naturally aligning yourself on the right side of that equation well everybody they always bring up the hyperinflation period that late 70s early 80s and i'm quick to tell them a matter of fact we recycled a slide from a previous show because i was like stocks did great during that look at this from 1979 inflation was 11.35 that year the s p 500 made right under 19 so again if you think about this in common sense terms the value of your dollar eroded by 11 that's what inflation means however your dollar increased based on the s p 500 term by 19 so what you get to keep is the difference your purchasing power even in an inflationary time increased by about eight percent which is remarkable 1980 inflation was 13 and a half percent that's where because everybody's always daydreaming man if i could have walked in a cd paying me 13 per year back then we all think that's that's great but look 33 is what the s p 500 made that same year 1981 yes inflation was once again double digits with 10 percent and the stock market did lose they lost five percent that year but then 1982 inflation now is dropping at six point one six percent and then look at that the stock market recovered from its five percent loss in 1981 to making 21 1982 you're like man maybe they cherry picked this maybe they went out there and just chose this you know four year period i bet this thing got crushed in the long term so we want to take the picture out even further we did from 1980 to 2020 that is a 40 year period and once again just like we did this with real estate if you compare inflation annually to what's going on with the s p 500 annually it looks like an ekg where the majority of the years the s p 500 is definitely higher but it's those down years that's why i talk about ekg it's those down years the volatile years where you'll see there are five approximately five years that out of this 40-year period where the market actually went below zero meaning it lost money we heard one of them was 1981 i believe when i was doing the earlier example but fortunately that's not how investing works we talked about it's the walk up the mountain with the yoyo you're going to higher and higher places because there's enough good years approximately 8 out of every 10 years that you get over performance you get to capture you get to keep it and you get to let that stack on top of each other that's how compounding interest works that the next slide shows i mean bo this is tremendous the separation the annualized performance from 1980 to 2020 of inflation was 3.2 percent we've used that number before the s p 500 during the same period was 12 what that means is even though the value of a dollar was eroded by 3 per year what your actual purchasing power increased by was almost nine percent the difference in the 12 percent growth and the three percent inflation that's a nine percent real rate of return not only did your army of dollar bills get nominally bigger it grew the actual ability of your army of dollar bills to go out there and purchase goods and services increased because you had an asset that outpaced the rate of inflation and that's the name of the game when it comes to building an army of dollar pills that's really what you want to do you're not trying to just get to 2.6 million boulevards you want to be able to buy the things you want to buy and do the things you want to do when you reach financial independence so inflation certainly has to be something you take into account when you think about your long-term plan i do want to give one more tip that i think all investors and equities need to understand in the short term if inflation like i said burst through the door caught us off by surprise all by surprise your equity holdings in the short term might get beat up a little bit because look economic cycles get scared volatility fear kicks in but here's what i know over the long term because remember you shouldn't put any money into these type of investment classes unless you can give them at least five to seven years to work in the long term these assets are going to be okay so don't let those short-term volatile market fluctuations keep you from reaching your goals and the big thing i'm getting out of today's show is be proactive don't let this look plan for it but don't go so crazy that you know you're so right that on august 16th of 2021 you've got to have all your money out i just made up that date i don't even know it's two days before like one of my daughters is born and you know a few days before an anniversary so maybe that played into it but don't be so sure of your opinion on the investments that you choose this day to go all in all out of something the better plan is to have that offense of building the financial plan building the asset allocation building the approach to no matter what happens the plan is going to be good in the middle of what comes your way in the future as well as getting you to financial independence don't get yourself in a pickle of a situation where all of a sudden something happens and you're reacting reacting is usually the worst thing that we can see somebody do with their portfolio that's exactly right if if you've not had a chance in addition to talking about macroeconomic ideas like inflation and things to be thinking about portfolio construction we're going to keep getting information out here to you we're going to keep loading you up so that you can be prepared for whatever the financial markets whatever the economy throws at at you we want we want you to feel like you have a team in place that can help you navigate that and approach it well if you've not gone to our website go to moneyguy.com we have a resource page out there where you can access a myriad of resources to go help you take your finances to the next level so make sure you're using that go out to youtube make sure you subscribe if you're not subscribed on itunes subscribe on itunes so that you can get the content in your ears in front of your eyes every week as we have new content coming out now there's gonna be a few of you out there watching this and be like man i'm realizing i've kind of built up something here i've got i've built up some assets some of this sounds a little complicated sounds like you know because i don't know what i don't know i built up this seven figure portfolio what should i do there are a group of you that look don't don't just get yourself overwhelmed this is the abundance cycle we know that you're out there you're you're listening you come you've learned you've applied you've grown these concepts to where your assets are now substantial but now you just don't feel comfortable making the decision anymore that is the graduation point of the abundance cycle we know we can give you all this free information because at some point you're going to be so successful that you'll want to have somebody kind of help you through the next phase of how you actually get to spend how you get to use how do you get to steward and create a legacy with these assets we'll be waiting we work with clients all across the country so feel free to reach out and just thank you thank you thank you for all the support the growth everything we have we want to make sure we continue to keep creating great content for you guys i'm your host brian preston mr bo hansen money guy team out

Channel: The Money Guy Show

Views: 99,657

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance, How to Protect Your Money from Inflation!

Id: TBTHrReL06U

Length: 46min 41sec (2801 seconds)

Published: Fri Mar 19 2021