We can largely control the first two by maximizing the use of low-tax vehicles such as TFSAs and RRIFsand avoiding fee-based investment solutions. Stocks and interest rates are more difficult and are usually addressed by ensuring that the traditional free lunch with diversification and asset allocation suits your financial resources and lifestyle goals.
But what about inflation? In the first half of 2021, inflation was variously portrayed as an ominous impending threat or merely a “temporary” spike triggered by the COVID recovery. This summer has certainly gone uphill: food prices are at their highest level in nearly three decades, and prices for apartments, energy and even used cars are skyrocketing. US inflation is up 5.4% year over year and is at a 13-year high.
It remains to be seen whether the US Federal Reserve rightly classifies this as “temporary” or whether Larry Fink, CEO of BlackRock, Inc., is right in saying that it is far more anchored. “Longer temporarily,” joked MoneySense colleague Dale Roberts in his Weekly market overview, is an oxymoron.
But if you’re considering retirement or partial retirement, is inflation a threat enough to consider postponing? We have tackled similar terrain this room a year ago, just after the Covid bear market. Then as now, the long-term future is essentially not foreseeable. Vancouver-based portfolio manager Adrian Mastracci of Lycos Asset Management Inc. sees it this way:Various experts advocate both a robust economy and one that is not quite so. Investors should keep in mind that they cannot control any of the flavors. You can get both, one followed by the other. “
Some fear inflation is a threat to stocks. However, A stock portfolio in itself can be a good inflation hedge as long as the right stocks are chosen, says Matthew Ardrey, investment advisor and portfolio manager at TriDelta Financial, based in Toronto. “You want to invest in companies with relatively inelastic demand for their products,” says Ardrey. “A company that can pass the costs on to consumers instead of absorbing them will be able to be more profitable.” Some stocks are more prone to inflation than others. Bad money‘S. Jim Cramer recently said that high-tech digital trading stocks like Google could be inflation havens. Those who can raise prices, like Netflix, can also be similarly isolated.
Aside from stocks, Ardrey recommends adding a trio of other asset classes: Commodities, real estate and gold. Commodities are relatively inelastic in their demand, so price increases have little impact on the amount of consumption: more on that below. REITs (or REIT ETFs) are an easy, liquid way to add real estate to an inflation-resistant investment portfolio. “Physical assets like real estate often continue to grow above the rate of inflation. Also, if the loans to buy the property are fixed rate, inflation will reduce the cost of repayment over time. ”“ However, in a post-COVID environment, you need to be selective about where to invest in this asset class, ”warns Ardrey. Focus on inelastic areas like residential property. People will always need a place to live. “
In favor of gold, there are concerns that governments will increase their money supply by “printing money”, which raises concerns about creditworthiness. “When the markets are more unstable, investors often switch to gold,” says Ardrey. “Precious metals can offer protection against inflation. They are a primary input in many manufacturing cycles and often have no real replacement, which makes them inelastic. ”(Read more about buying gold here.)
Personally, I rely on traditional asset allocation to cover the various possibilities of inflation, deflation, wealth and depression. I always found Harry Browne’s permanent portfolio to be a good starting mix of assets to prepare for all possibilities: stocks for wealth, bonds for deflation, cash for depression / recession, and gold for inflation. Browne, who died in 2006, is known to give everyone 25%.