Inflation - Planning and Protecting
- William Jordan, Financial Advisor
I feel like Paul Revere. For the past few years I’ve been calling out the warning “inflation is coming, inflation is coming” but unlike Revere it seems no one has been listening.
During May and June, the interest rate on the ten year government bond, the most significant fixed rate asset in the world, jumped by almost 50%. It is certainly possible those rates will settle back down to where they were for the last year, but it is even more probable that low interest rates have seen their day and we are about to begin a long climb in interest rates and inflation.
For those who are nearing or have already entered the retirement stage of their lives, evaluating how to protect and how to plan for a rise in inflation is a critical issue.
While no one can be certain where interest rates and inflation will head or when/where they will top out, all the warning signs are present for the return of severe inflation.
Protecting from Inflation
If we begin with the assumption high inflation is on the way, there are a number of things you can do to protect yourself from the impact inflation can have on your lifestyle.
Since interest rates are still low for now, take this opportunity to lock in long term interest rates on assets such as your home. Now would generally not be the time to pay off the house, but in actuality it would be a great time to lock in a 30 year fixed mortgage if you haven’t already done so.
In a similar vein, try to lock in fixed prices or fixed increases in significant expenditures. As an example, I have spoken with many people who have invested in a solar energy system for their home. I do not claim to be an expert in solar so I am not recommending it per se, but the concept of buying something which will fix your rates for a commodity like energy for twenty or thirty years would make a lot of sense in an inflationary environment.
Planning for Inflation
The opposite of locking in long term low rates is to invest only in short term high rate investments. If you invest only in CDs, stay with three to six month CDs as those rates should begin to rise. As an aside if you are investing only in CDs, there are much better short term places you can invest your money while still keeping it safe.
Now would not be the time to buy long term bonds or long term CDs. Avoid fixed or immediate annuities as they lock you in to today’s rates.
On the asset side of the equation, buy assets which tend to appreciate well during inflationary times, especially if those assets also create income. My favorite such asset which I have been recommending for the last three years would be real estate.
Over the past year I have seen countless real estate investments which provide yields to the investor of anywhere from 4% to 10% per year and would benefit from a rise in value if we are hit with inflation.
As interest rates rise the window of opportunity to invest in great real estate assets with low interest rates will close. I am already on record saying 2012 and 2013 will be considered the best real estate buying opportunities for a generation. As a result we have focused heavily on investing in these types of assets for our clients.
As Always Have a Plan
Forgive me dear reader for sounding redundant but I must repeat myself. The worst thing you can do is to do nothing and simply allow events to shape your life. Take this information and take action on it. Assess your current situation and do what you can to both protect and plan for the coming wave of inflation.
William Jordan is a nationally recognized wealth manager and well known speaker on financial and investment topics. To ask a question or request an investment review meeting, contact his office at (949) 916-8000 or online at http://wjica.com. William Jordan Associates is a Registered Investment Advisor with the state of California. Past performance does not guarantee future results.