Born in 1980, I entered the world nine years after President Nixon made a monumental change to the US Dollar’s trajectory. In 1971, he ended the dollar’s convertibility into gold, ushering in the era of fiat money. This means that for every dollar in your pocket, there isn’t a corresponding piece of gold buried under the White House. As a result, we’ve seen cumulative inflation of over 2,000%. The past three years have been particularly dramatic, driven by a perfect storm: the COVID-19 pandemic, stimulus packages, supply chain disruptions, and the Russia-Ukraine war, among other factors.
Why Worry About Inflation?
We’ve grown accustomed to paying $9 for a latte at Starbucks, but the implications of inflation extend far beyond our daily expenses. It significantly impacts our ability to invest and build retirement savings.
Consider this: Remember when you declared as a kid that you’d be a millionaire someday? Today, $1,000,000 has the same purchasing power as $130,000 did in 1971. What will $1,000,000 be worth in another 30 years? This erosion of purchasing power underscores the urgent need to rethink our investment strategies.
Government Measures and Their Impact
While the government is trying to curb spending with high interest rates, it’s important to understand that this approach aims to achieve disinflation (slowing down the rate of inflation), not deflation (reduction in prices).
Key Questions for Your Investment Strategy
As we navigate this inflationary environment, consider these critical questions for your investment strategy:
1. Income Security: How secure is your ability to generate income sufficient for your needs and investment strategy? Protect your income.
2. Budget Alignment: Is your budget in line with your investment strategy?
3. Portfolio Mix: What is your current portfolio mix of assets?
4. Historical Performance: How have these asset types historically reacted to inflationary spikes?
5. Inflation-Resilient Assets: Which asset classes perform well in inflationary economies?
6. Sector Performance: Which sectors of the economy are likely to thrive? Consider healthcare, technology, AI, commodities, etc.
7. Execution Rules: Create rules for executing your strategy based on these considerations.
Insights from Experts
I recently had a conversation with two friends and brilliant investors about this very topic. We discussed where we are focusing our investment efforts over the next five years. If you’d like to listen to our discussion, please email me at marcus@TheWholeEnchilada.biz with the subject line “Inflation.”
Go live life on your terms, my friend.